Business in flux. With material deterioration in comp, e-commerce growth, margins, and customer resonance, we remain Peer Perform. We expect lack of buying interest until a new CEO is named, a new strategy outlined, or business performance picks up. However, we note EXPR has ~$2.50/share in cash and no debt and can likely ride out volatile performance. We see no immediate fix to the issues but continue to monitor EXPR’s progress as we also see little risk of liquidity issues in the near-term. With negative margins, small “wins” can result in recovery with meaningful stock implications.
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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.
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.
Before market open 1/15/19, EXPR confirmed that “fourth quarter to date business performance is tracking within the guidance the Company issued on November 29, 2018.” However, we note the wide range of guidance that was provided post a disappointing Black Friday weekend: 4Q18 comps in the range of -5% to -7% and EPS in the range of $0.11 to $0.20. At the time of the guidance, EXPR was running below plan on both comp and margins, reflecting their disappointing outlook for holiday. For 4Q18, we forecast a -7% comp, with +15% e-commerce comp and -16% store comp. We expect inventory to continue to build into 2019, pressuring merchandise margins, and ongoing negative store comps causing fixed-cost deleverage. The stock traded essentially flat in the trading session despite a 29% short position, suggesting the report did not cause a change to negative sentiment.
We believe 2018 may have been “peak season” for retailers. We continue to believe in the Retail Death Curve phenomenon. The 2018 lift in mall traffic was against easy compares and pent-up demand. Despite clean inventory in 2018, there was no evidence of broad-based pricing power. Retailers were as, if not more, promotional than prior year and “bought the comp.” Tax reform savings were reinvested in store-related wages and deferred capital spending – both contributing to a higher fixed cost infrastructure than before tax reform – adding to greater deleverage risk.
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.
Disappointing comp + deeper promos = supply > demand. Starting in 1Q17, EXPR started to pull-back on promotions when comps started to improve: going from -10% in 1Q17 to +1% in 1Q18. Then, we saw the company start to promote more heavily in 2Q17. They were able to maintain the +1% comps until this quarter, but they were able to do so by promoting more. Unfortunately, promotions cannot sustainably drive positive comps. Furthermore, even with the deeper promos, given the lack of sustained comp lift, supply clearly is greater than demand. We believe management is making the correct steps in righting the ship but look for more sustainable promotions and comp sales before becoming more constructive. Thus far, and management alluded to this during their earnings call, 4Q18 QTD promos show that EXPR is likely running below plan on both comp and margins.
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