2QTD retail segment comps trending positive mid-teens. After market on 6/11/18, URBN filed its 10-Q and reported 2QTD retail segment comp of +mid-teens. We believe QTD comps are at the low end of the range (+14%). Included in the Management's Discussion & Financial Analysis, URBN commented on the consolidated QTD comp trend (including DTC), “Thus far during the second quarter of fiscal 2019, comparable retail segment net sales are running mid-teen positive.” There remains a great deal of the quarter with the July 4th holiday and the start of the summer break ahead.
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Expect 2QTD trends in-line with +LDD guidance. After market on 6/11/18, we expect URBN to file its 10-Q. We expect another solidly positive comp report, but do not expect a material acceleration from the +LDD guidance provided on their most recent earnings call. 2QTD, our proprietary promo checks show URBN consolidated promo levels are running “Flat” to LY (see Exhibits 4-10 on pages 4-6), suggesting comps are likely in-line with the +LDD guidance, but may not be materially above at this point in the quarter. Based on our checks, each of the brands were opportunistically promotional over Memorial Day weekend. In the Management's Discussion & Financial Analysis, URBN comments on consolidated QTD comparable retail segment trend. We expect commentary similar to: “Thus far during the second quarter of fiscal 2019, comparable retail segment net sales are running low-double-digit positive.” With only one month completed, we choose to maintain our 2Q18 comp estimate of +10.1% (Cons +10.1%) and our 2Q18 EPS of $0.73 (Cons $0.74). There remains a great deal of the quarter with the July 4th holiday and the start of the summer break ahead.
Omnichannel 301: The Four Factor Success Model. In this primer, we answer the question, “What should an investor look for to see if a retailer is successfully making the shift to e-commerce?” A successful omni model has four critical elements: 1) positive comps in both brick-andmortar and e-commerce, 2) a fixed-cost breakeven leverage point reduced to the flat to low-single-digit range, 3) channel earnings parity (e.g., an e-commerce order value is >2x that of the store transaction value), and 4) highly accretive e-commerce EBIT margins. If these four criteria are met, the omni-retailer will be highly incentivized to grow ecommerce as quickly as possible to generate both higher margin rate and greater earnings power. Each of these factors is explained in detail in this note and this process can be used to analyze any retailer that is shifting its business from brick-and-mortar to e-commerce.
One of the most critical elements of a successful omnichannel strategy is the ability to positively comp in the brick-and-mortar channel. URBN accomplished this in 1Q18. Comp was +10% vs. Cons of +8.9% and adjusted EPS was $0.38 handily beating Cons. of $0.31. URBN delivered upside across the board on sales/comp, gross margin and SG&A. URBN is executing a product-led turn, driven by inventory, expense control, and real estate discipline. With high expectations into the print, shares traded off 2% in the after-hour session.
The setup is mixed as: 1) tax stimulus is supportive of demand, 2) spring was unseasonably cool, 3) 2QTD has rebounded due to pent-up demand, and 4) 1Q18 sector promos were “Flat” YoY (click here for our 1Q18 Wolfe Promo Tracker). We are positive on URBN, ROST. We are cautious on the Gap brand at GPS, WSM, LB but believe stocks for all three reflect expectations for margin pressure.
In our research on the omnichannel shift, we have discussed the most critical element to successful margin expansion: positive brick-and-mortar, or store, comps. We forecast that all concepts in both store and e-commerce are positive comping. Our checks suggested that the UO brand was likely the most impacted by the weather in April, but checks suggest the brand has rebounded 2QTD, pulling back on promotions and running better YoY full price business. Anthropologie and FreePeople were solid throughout the quarter. For 1Q18, we forecast a +9.6% vs. Cons of +8.8% and EPS of $0.34 vs. Cons of $0.30. By channel, we forecast a +15% digital comp and a +7% brick-and-mortar comp. We believe positive leverage from the brick-and-mortar channel can contribute over 60 bps of gross margin expansion alone. Recall last year, 1Q17 merchandise margins were down 160 bps and deleverage was 120 bps.
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After early-quarter momentum driven by an earlier Spring Break/Easter, our April checks showed a dramatic slowdown in sales momentum as unseasonably cold temperatures delayed purchasing. We pay particular attention to end-of-quarter changes in promo activity as it is indicative of whether inventory units are on plan. We noted increased promos in April at AEO, EXPR, GPS (at both Gap and Old Navy), LB, Urban Outfitters brand only, and WSM (all concepts) suggesting they all lost momentum in the last month of the quarter. Click here for the Wolfe Promo Tracker excel model.
Apparel Sector grade: C+ in 4Q17 (from B+ in 3Q17). Despite a strong holiday, the Softlines sector is less clean than it was entering 4Q17. As a result, this may weigh on margins. In addition, promos are rampant throughout the industry, so pricing power and margin expansion remain fleeting. Unresolved, still, is the pressure from omni-channel deleverage as sales transfer out of brick-and-mortar to the e-commerce channel. For 4Q17, 43% of covered retailers posted a positive sales-to-inventory spread (down from 57% in 3Q17). Take note, however, that supply (inventory) management is no longer yielding gross margin expansion as mall traffic (demand) remains in a multi-year decline. Even with “clean” inventory at the beginning of a quarter, slack demand requires promotions to drive sales. A sales-to-inventory spread at parity is only supportive of margins insofar as future demand is, at worst, flat.
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