Wolfe Research's Senior Consumer Research Analyst, Adrienne Yih, hosted a webcast to discuss how rare this competitive backdrop is, questions for management, how achievable the 1H and 2019 guidance are, what current QTD promo trends look like, the value of Gymboree assets, sensitivity accretion analysis, and where investors could be exposed to the downside.
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Rare is the setup that lies in front of PLCE. After hastening Gymboree's demise, PLCE possesses perfect information on their once formidable specialty competitor. They now have Gymboree's customer file, IP, and a detailed map of where the highest return market opportunities lie. Secondarily, PLCE has ensured this information cannot be used against them by another competitor.
We expect a miss to comp (we are flat vs. Cons +3.0%) as well as gross margin (we are at 34.3% vs. Cons at 35.1%). PLCE will report 4Q18 results in late March.
The January reading plummeted, falling two rankings from December’s reading of 3/10, suggesting investors started re-shorting stocks during the January rally after being sidelined at year end. In January 45.7% of retailers posted a short position >15% (up from 39.1% in December). Since we last published this report on 12/17/18, the XRT is up 1% vs. the S&P 500 +4%. 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.
Although many companies posted sales upside for the holiday season, we think the upside is the result of deeper promotions (despite clean inventory) in order to coax consumers to shop. CPRI and TPR reported quarterly earnings last week that echoed this sentiment. Both companies cited a promotional environment, among other issues, that resulted in misses on the top-line and on gross margin vs consensus. We expect general misses to gross margin and sales given the trend of deeper promotions over the last four quarters from a peak score of 43 or “Flat” in 1Q18 to 33 or “Deeper” in 4Q18.
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.
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.
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