1Q19 beat on comps and SGA; miss on GM. After the market on 5/30/19, WSM reported a $0.12 beat, composed of a sales, comp and SGA beats, offset by a GM miss. WSM reported comps of +3.5% that handily beat Cons of +1.7%. While WSM’s brands, particularly West Elm, remain strong, we believe that consumer buying behavior will continue to migrate online and the demands for free and rapid shipping will continue to increase the cost of doing business to satisfy the customer. We remain cautious of long-term margin erosion, as we estimate that brick-and-mortar comps remain negative, and therefore reiterate Peer Perform. Stock was up 13% in reaction to the beat.
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1Q19 results were generally in-line with management expectations but we note the quarter continued the return to top-line growth (which inflected in 4Q18), driven primarily by accelerating transaction growth, and for the third quarter in a row, comp was driven by transactions, which outpaced ticket growth – a measure in our mind of sustainable market share gains. Over the next decade, ULTA is uniquely positioned to capitalize on 1) demographic trends (e.g., Millennials, Gen Z, minority population growth), 2) Beauty segment trends, 3) social media trends, 4) consumer behavioral trends and 5) incremental digital sales growth. With secular strength and we believe weakening traditional beauty destinations such as department stores, we reiterate our OP.
Before the market open today (5/29/2019), DKS reported a slight EPS beat of $0.61 vs Cons of $0.58. Flat comp beat Cons of -1.3%. The company noted that comps sequentially improved during the quarter after a slow start in February and e-commerce grew 15% YoY during the quarter. Gross margin beat Cons of 29.2% by 20 bps, while SG&A came in worse than expected vs. Cons 25.3% by 20 bps. During the quarter the company bought back $107M of shares. The company raised full-year guidance from $3.15-$3.35 to $3.20-$3.40 on slightly positive to +2% comps (was flat to +2% comps). Despite the 1Q19 beat and raised FY19 guidance, we are still hesitant to recommend shares due to brick-and-mortar comps that remain, albeit improving, negative (we estimate -2% brick-and-mortar comp for 1Q19, Exhibits 5-6). Reiterate Peer Perform. In reaction to the report, DKS traded down 7% on the day.
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.
Before market on 5/2/19, W reported a slight miss on adjusted loss per share of ($1.62) vs. cons ($1.60). Sales, direct revenue, customer growth, gross margin, Revenue per Acquired Customer all beat, but W spent the incremental sales to acquire new customers and pressured EBIT once again. After returning to positive EBITDA in 4Q18, the U.S. segment delivered negative EBITDA, as did international as they invest to grow sales abroad. Customer retention remains about 2/3 of the customer base with increased customer visits suggesting a higher lifetime value of customer. The destination is to be the dominant online home retailer and the path is amassing market share utilizing W’s proprietary CastleGate and Wayfair delivery network. We stand behind the fact that W is growing online sales in the home furnishings segment at 2x the segment CAGR of 15%, and they are rapidly gaining loyalty in our opinion.
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.
BBBY’s transformation is based on many as-yet unproven assumptions. OM recovery now shifts towards GM from an SGA-driven recovery last quarter. Within GM are assumptions on sales leverage, improved sourcing, reduced couponing, with persistent pressure from Beyond+ membership growth. It’s hard to model such improvements when 1Q19 guidance was well off the mark, and the near-in story appears to be worsening before inflecting in 2H19. Management’s focus on profit over sales is a positive, but our Retail Deleverage thesis is based on driving slightly positive comps at brick-and-mortar and mitigating fixed cost deleverage. The fact that brick-and-mortar comps continue to run -MSD, we believe is an indication that BBBY simply has too many stores (supply) for customer demand. However, with activists seeking to expedite change and an aggressive buyback plan to support EPS, we remain sidelined. After market shares were -9%.
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