Heading into RH earnings, we want to point out the impact of the implementation of Accounting Standard Change 842 – Lease Accounting (“ASC 842”). For most retailers this change has little to no impact on the income statement. However, RH has a portion of build-to-suit leases which ASC 842 eliminates and therefore has a direct impact on the income statement. While this change does not impact EPS, it is a reclassification of build-to-suit interest expense to the rent line in COGS. As such, we estimate ~100 bps reduction on both GM and OM, offset by a roughly $28 million reduction in interest expense. Per RH’s 10-K, “certain of our store leases are accounted for as build-to-suit lease transactions which result in our recording a portion of our rent payments under these agreements in interest expense on the consolidated statements of income.” Please see Exhibit 3 for detailed analysis on the ASC 842 impact. RH will report 4Q18 earnings after market close on 3/28/19; dial in (866) 394-6658.
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After the market on 3/20/19, WSM reported a $0.14 beat, composed of a sales, SGA and buyback beat, offset by a GM miss. WSM reported in-line comps of +2.4% vs. Cons of +2.4%, with strong e-commerce growth offset by brick-and-mortar comps. We remain concerned about intense price competition in the home furnishings space and mid-teen online category growth that will continue to deleverage the brick-and-mortar footprint. While WSM’s brands 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. Remain cautious of long-term margin erosion and therefore reiterate Peer Perform. Stock was up 3% in after-market trading fading to up 1% pre-market open.
Uniquely positioned to win. 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. The 4Q18 report showed a return to top-line growth, driven primarily by accelerating transaction growth. For the second quarter in a row, comp was driven by transactions which outpaced ticket growth. We believe ULTA is prudently investing in critical infrastructure as they grow. We continue to view ULTA as a secular winner benefitting from Millennial beauty buying behavior. Reiterate Outperform.
Before the market open today (3/12/19), DKS reported a slight EPS beat of $1.07 vs Cons of $1.06. Comp of -2.2% beat Cons of -3.3%. E-commerce grew 17% YoY during 4Q18. Gross margin missed Cons of 28.8% by 100 bps and fell 170 bps YoY. SG&A came in better than expected vs. Cons 23.2% by 100 bps and was flat YoY. During the quarter the company bought back $33.7M of shares. The company expects strategic investments of $60M during FY19, specifically $35M to enhance the store experience, $15M to improve e-com fulfillment and $10M in technology. The company plans to eliminate $30M of expenses to fund half of the investment. Still, we hesitate to recommend shares due to this increase in investment that will weigh on margins and brick-and-mortar comps that remain negative (we estimate -9% brick-and-mortar comp for 4Q18, Exhibits 4-5). Reiterate Peer Perform. In reaction to the report, DKS traded down 11%.
efore market on 2/22/19, W reported significant upside for 4Q18, beating across key metrics: sales, customer growth, gross margin, Revenue per Acquired Customer, and EBIT. The U.S. delivered positive EBITDA while international markets delivered another negative EBITDA quarter. 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 WHs and Wayfair delivery network. CEO Niraj Shah explained that W is sales maximizing in the short run to maximize profits (on a higher sales base) in the long run. With the quarterly metrics suggesting global growth is following a similar (and expedited) path of U.S. customer growth and brand awareness, W shares increased 28% during the trading day.
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.
Yesterday (01/09/19), after market close, BBBY reported 3Q18 EPS of $0.18 aided by one-time tax benefits (Cons $0.18). The company missed on sales, comp, and gross margin, slightly offset by better-than-expected SG&A. The company reported comp of -1.8% vs. Cons of -0.3%. Gross margin was 50 bps lower than Cons and down 210 bps YoY. FY18 guidance is $0.01 above prior Cons, with EPS now near $2.00 (Cons $1.99). Notably, the company said they believe FY19 EPS will be about the same as FY18. We believe this will be challenging given the structural shift to omni and further margin deterioration as Beyond+ increases in penetration. We reiterate our Underperform and believe promotions and fixed cost deleverage will persist until the pace of store closures accelerates meaningfully. On the comments about FY19 EPS and with a 25% short position, shares are +16% today.
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