Heightened supply risk for 2019. During 3Q18, retailers took a turn for the worse, as inventory increased modestly at a faster rate than sales. With no ability to raise prices to drive comp, retailers must rely on increased unit volume to drive sales growth. Note that this is a snapshot entering 4Q18. Most results, save for a few exceptions (e.g., TGT – PP, COST – PP, covered by Scott Mushkin, and LULU-OP), have missed holiday sales. We expect inventory exiting 4Q18 to show even higher inventory-related business risk.
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Already baked into 4Q18 expectations are execution issues from unforeseen digital strength and pricing pressure. Our 4QTD checks (see Exhibits 5-8) show a flattening of YoY promos after two quarters of deeper promos. However, we believe the modest promo improvement is due to lack of inventory, and more specifically, lack of cold-weather product. We see this negatively impacting comps. Post-Christmas, our checks have shown stockouts both in stores and online of seasonally-appropriate product during some of the coldest temps of the season. We believe PLCE may have sold out of these items during the peak of holiday shopping at margin-eroding prices only to have insufficient inventory to comp in January. We note spring transitional product is being pulled up earlier to fill stores. Thus, we foresee a miss to comp (we are at +1% vs. Cons +3.3%) as well as a gross margin miss (we are at 34.3% vs. Cons at 35.6%).
The December reading rose for the second consecutive month, suggesting with valuations pulling in short sellers may be derisking. The November reading was 2 out of 10. In December 39.1% of retailers posted a short position >15% (was 42.2% in November). Since we last published this report on 12/17/18, the XRT is up 6% vs. the S&P 500 +2%. We rank Sector Sentiment on a scale of “1” being the most negative sentiment to “10” being the most positive sentiment. The basis for the ranking is based on the number of retailers in the sector with >15% short positions.
It’s preannnouncement season. Post-holiday preannouncement season is here. With up to 85% of sales completed, retailers know their 4Q fate. As such, we are publishing a post-holiday promo tracker update with our call outs on upside and downside performance for the quarter. Often, the holiday success or disappointment translates into a similar outlook for the forthcoming year. With valuations pulling back in 4Q, we believe our positive call outs are worth a look ahead of 4Q18 preannouncment season and as long-term outperformers in the sector. We expect preannouncements from at least the following companies: ANF, AEO, PLCE, EXPR, CPRI, LB, LULU, ULTA, URBN, W.
Sector Sentiment 2, on a Scale of 1 (worst) to 10 (best): The November reading rose from the October reading of 1 out of 10 with 42.2% of retailers posting a short position >15% (was 44.4% in October). Since we last published this report on 11/14/18, the XRT is down 11% and therefore investors may have taken some money off the table. We rank Sector Sentiment on a scale of “1” being the most negative sentiment to “10” being the most positive sentiment. The basis for the ranking is based on the number of retailers in the sector with >15% short positions.
Before the market open (12/6/18), PLCE reported a sales, comp and SG&A beat, offset by a material GM miss (details in note). Unforeseen digital growth is wreaking havoc on the supply chain. The growth is forcing the company to ship from store (at a rate of 15x its plan) given low levels and stock-outs of digital inventory. Although it is concerning that unforeseen digital demand resulted in execution issues, we think this a good problem insofar as it proves the $50M committed investment is working. This issue may persist through 1H19 but is both identifiable and fixable. Furthermore, given evidence that they can successfully fulfill from stores, we see no need for PLCE to build an additional distribution center.
3Q18 Consumer Sentiment Poll scores 5. 1 out of 10 (vs 6.2 in 2Q18). Each quarter, we send out a brief survey to gauge investor sentiment prior to earnings, where 1 is “Terrible” and 10 is “Excellent.” Thanks for replying, if you did! Survey results are completely anonymous, and the greater the response rate, the more conclusive the results, so please consider participating next time.
The October reading exceeded the September reading of 2 out of 10 with 44.4% of retailers posting a short position >15% (was 43.5% in September). This is the third straight month of percentage increases. The last time the sector sentiment was a 1 was in July 2018 when 45.7% of retailers posted a short position of >15%. We rank Sector Sentiment on a scale of “1” being the most negative sentiment to “10” being the most positive sentiment. The basis for the ranking is based on the number of retailers in the sector with >15% short positions.
3Q18 Promo Rating: “Flat;” 2Q18 Rating: “Flat.” Our 3Q18 Promo Score was 39 out of 100 (vs 40 out of 100 in 2Q18). Our Promo Score tracks YoY promotional activity as a proxy for merchandise margin direction. We pay particular attention to end-of-quarter changes in promo activity as it is indicative of whether inventory units are on plan. Click here for the Wolfe Promo Tracker excel model.
Before the market open (11/05/18), PLCE announced the consolidation of key management roles, with an eye towards streamlining and cost efficiency. Specifically, Jane Elfers, current President and CEO, will reassume responsibility for product from Pamela Wallack, and Mike Scarpa, current COO, will reassume direct responsibility of the CFO role from Anurup Pruthi. The consolidation is the result of redundancies related to Jane’s and Mike’s existing responsibilities in the areas they are respectfully taking over. Ms. Wallack was with the company for 17 months, and Mr. Pruthi has been CFO since 2014 when he took over the role from Mike Scarpa. Stock has reacted down 12%, which we believe is overdone for a company 1) taking share, 2) beating numbers, 3) with forthcoming easy, fixable issues as early as 1Q19, and 4) intently focused on cost optimizing.
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