AMC on 6/12/19, LULU reported a 1Q19 adjusted EPS beat of $0.74 vs Cons of $0.70, beating on sales, comp, GM, a slightly lower tax rate, and buyback, offset by higher-than-expected SG&A. Comps were +16% vs. Cons of +11.5%.
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This custom model provides a template for calculating the impact of a 25% tariff on goods from China imported into the U.S. including average unit cost increase, margin hit in basis points, earnings reduction and average unit retail necessary to offset tariff impact.
Use our Tariff QuikCalc Model (click here) to quickly calculate the impact to a retailer's cost, margins, earnings, and, most importantly, to determine the percent increase in prices needed to offset the tariff. We have done this work for our coverage universe, but this is only a small sample of the retailers, vendors, and manufacturers impacted. Therefore, we developed a "quick and dirty" model to give you a general sense of the impact. For the average specialty retailer, we estimate an average unit cost increase of 4.2%, which if entirely unmitigated through price increases results in an average earnings reduction of 35%. The average unit price increase necessary to offset the higher tariff is 2.1%.
The April reading was the fourth consecutive month at 1 or the worst score possible. In April, 50% of retailers posted a short position >15% (up from 47.8% in March). We note the percentage of retailers with a short position over 15% continues to increase month-over-month. 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.
LULU’s analyst day was the roadmap for the company’s ongoing evolution from a powerful specialty retail brand to a wholistic mind/body lifestyle company. With much detail provided on channel, geographic, and product breakdown, we have incorporated the drivers of the company’s five-year plan into a detailed model. While our note took a bit longer to get to you, we wanted to build a model with detailed drivers by channel mix, geographic mix, and product segment mix. In doing so, we believe you’ll find that there is a level of conservatism in each of these growth avenues that gives us great comfort in over $9.00 in earnings power in 2023. We believe the only way to visualize all the moving parts that constitute growth opportunities is to model each segment of growth, and we did that for you.
During 4Q18, inventory risk continued to increase as sector inventory grew at a faster rate than sales. Given a macro backdrop that is no longer fueled by tax stimulus, we believe this is harbinger of margin pressure in FY19. Note that this is a snapshot entering 1Q19, so any top-line weakness in 1Q will result in even greater inventory excess. We expect this inventory risk to build progressively throughout FY19 as retailers try to “comp the comp” but lack pricing power and must simply drive unit volume to deliver positive comps. Simply put, sector wide business and performance risk has materially increased.
AMC on 3/27/19, LULU reported a 4Q18 adjusted EPS beat of $1.85 vs Cons of $1.74 on sales, comp, gross margin and buybacks offset by higher-than-expected SG&A. Comps were +17% vs. Cons of +16.8%. Digital sales and brick-and-mortar sales both contributed to the significant comp with growth of 39% and 7%, respectively. The company beat on GM by 10 bps vs Cons of 57.2% but missed on SG&A by 30 bps vs. Cons of 28.6%. The company noted that product margins increased by 170 bps YoY due to lower product costs, favorable mix and lower markdowns. The company issued 1Q19 guidance of $0.68 to $0.70 vs. Cons of $0.67 on comps of +LDD. The company also issued FY19 EPS of $4.48 to $4.55 vs. Cons of $4.41 on comps of +LDD. We reiterate our Outperform rating. As a result of the beat, shares are +12%.
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.
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