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).
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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.
Underpromise, overdeliver. Another solid holiday performance with all concepts gaining share and customer loyalty. Strong merchandising, higher brand penetration, and a calculated bet on the holiday toy category all drove sales, ticket, and merchandise margins. While the new generation of shoppers shuns the tired on-mall experience, when presented with such compelling value (defined as quality for price), shoppers will frequent a brick-and-mortar store. We further note that TJ Maxx’s e-commerce channel has 100% unique product from the stores, significantly reducing cannibalization risk. After success with TJ Maxx, Marshalls will launch an e-commerce site in 2019. After setting cautious EPS growth expectations for 2019 on their 3Q18 earnings call, investors were relieved to see a return to double-digit EPS growth beyond 1Q. With strong cash flow, increased dividends and share repurchases, and one of the highest ROICs in retail, we reiterate OP.
With mall-based apparel retailers reporting “okay” holidays driven by promos, TJX comes through with significantly improved merchandise margins, “at-ticket” selling, and increased traffic/conversion, once again proving the strength and desirability of their Off-Price offering. Combining convenience, speed, and value, all concepts delivered sales upside. While the new generation of shoppers shuns the tired on-mall experience, when presented with such compelling value (defined as quality for price), shoppers will frequent a brick-and-mortar store. Further, we note that TJX’s e-commerce channel has 100% unique product from the stores, significantly reducing cannibalization risk. We note that the Off-Price model remains both offensive in upcycles and defensive in downcycles. We believe is the most attractive (and proven) business model. We do note that inventory grew faster than sales (even excluding LY’s 53rd week impact), so for the call that is an area to investigate – potentially opportunistic packaway or YoY timing differences. With strong cash flow, increases in both dividend and share repurchases, and amongst the highest ROIC in retail, we reiterate Outperform.
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.
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.
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.
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