BMO on 5/7/19, BURL reported a $0.01 beat driven by expense control despite a miss on comp due to ongoing weakness in ladies apparel. 2QTD has rebounded with comps running in the +1% to +2% guidance range. The strategy remains in place to drive unit growth, reduce store footprint, increase sales productivity, control expenses, and expand margins. We continue to believe in the 1) resilience of the Off-Price model, 2) BURL’s ability to gain market share in a highly promotional sector, and 3) ability to drive store traffic despite the accelerating adoption of e-commerce. With over 40%-unit growth ahead and potential margin expansion, we remain staunch supporters of the BURL story. On low expectations into print and improved QTD comps, BURL initially traded +10%, fading to +6% during the trading session.
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AMC on 5/23/19, ROST reported EPS of $1.15 vs. Cons of $1.12 on a reported +2% comp vs. Cons of +2%, which was driven by an increase in the average basket. The company noted that similar to last quarter men’s outperformed while ladies underperformed during the quarter. The company missed on gross margin by 20 bps vs. Cons of 28.8%. The company beat on SG&A vs. Cons by 40 bps but deleveraged 40 bps YoY. The company repurchased 3.4M shares during the quarter for $320M and remain on track to buy back a total of $1.275B for the year. Over the long-term we still believe the off-price model will continue to be successful and thus remain at an Outperform. Shares traded down 3% in after-marketing trading.
Another quarter taking share and building customer loyalty. Merch margins were down due primarily to higher freight expenses, which are likely to abate towards the 2H19. Despite imperfect spring weather, Marmaxx continued to take share from these on-mall share donors. While the new generation of shoppers shuns the tired on-mall experience, when presented with compelling value (defined as quality for price), shoppers will frequent a brick-and-mortar store. We further note that the e-commerce channel has ~75% unique product from the stores, significantly reducing cannibalization risk. With strong cash flow, increased dividends and share repurchases, and one of the highest ROICs in retail, we reiterate OP.
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.
BURL, the next chapter. Now may be the time to revisit the BURL story, after a rare disappointing 4Q18. The current leadership team, under Thomas Kingsbury, has successfully transformed BURL from a mass discounter to a contender in the Off-Price arena. Since its 2013 IPO (up 900%+ from IPO price of $17/share), BURL reached $6.6B in sales with a 9.0% OM in FY18. The next chapter will be written under newly-appointed CEO Michael O’Sullivan. Mr. Sullivan spent 15+ years driving growth and mid-teen operating margins at Ross Stores (ROST – OP) as its former President and COO. He will replace current CEO Thomas Kingsbury on or about September 16, 2019. Jennifer Vecchio has been appointed to President, Chief Merchandising Officer and also has experience at ROST during its growth phase. We believe the opportunity to replicate ROST’s playbook at BURL comes as a critical point as they try to break through the double-digit OM barrier. BURL traded -1% in after-market trading on leadership prospects and a negative preannouncement.
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.
A rare miss on top-line. BMO on 3/7/19, BURL reported an beat on Adjusted EPS driven by SG&A while missing Cons on top-line and gross margin. The company missed on the top-line due to disappoints in the cold weather and heritage ladies categories. The company believes the recent cold weather will rectify the cold weather apparel issue and plans more conservative sales from the heritage ladies category over the near term. Nonetheless, we continue to believe in the 1) resilience of the Off-Price model 2) BURL’s ability to gain market share in a highly promotional sector and 3) ability to drive store traffic despite the accelerating adoption of e-commerce. With over 40%-unit growth ahead and 400-600 bps of potential margin expansion, we remain staunch supporters of the BURL story. On the low-quality beat and disappointing guide, BURL traded down 12% yesterday (03/07/19).
4Q18 in-line EPS; REQ Score 6/10. AMC on 3/5/19, ROST reported in-line EPS of $1.13 vs. Cons of $1.13 on a reported +4% comp vs. Cons of +2.3% driven by a combination of higher traffic and an increase in the average basket. The company noted that men’s was the best performing category while ladies underperformed during the quarter. The company missed on gross margin by 20 bps vs. Cons of 27.4%. The company beat on SG&A in terms of Cons despite deleveraging 40 bps YoY due to previously mentioned wage investments. The company repurchased 3.1M shares during the quarter for $268M. Although freight and wage costs may pressure margins in the near-term, over the long-term we believe the off-price model will continue to be successful, especially when considering consumer backdrop may be peaking and off-price model is defensive and even more valuable in weaker economic environment. Shares traded down 2% in the two day’s since ROST reported AMC on 3/5/19.
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