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Recent rumblings of excess inventory growth have pressured the stock down ~9% in one week. Mid-day Tuesday, a store channel check report suggested heavy inventory levels flowing into stores. Based on our store checks, this is true – new, full-price flows of early/transitional back-to-school merchandise are indeed flowing into stores. The new flows are coincident with the biggest traffic driving portion of the quarter and the “Monster Sale” promo. To be sure, we will be watching promos in July like a hawk. Admittedly, weather is not great, but then again management expected a tough 2Q19 with demand pulled forward into 1Q and tough compares. With a 38% short position, what appears to be typical inventory cadence is being interpreted as inventory risk. We disagree. We believe what we are seeing is the in-store preparation for the high-traffic portion of the quarter and the earlier flows management discussed and planned for on the call. 

SFIX beat the quarter on sales, RevPAC, gross margin and $0.09 from better-than-expected taxes. The company reported Adjusted EPS of $0.07, beating Cons of ($0.03). The beat was the result of better sales ($408.9M vs. Cons of $395.1M) and gross margin (45.1% vs. Cons of 44.0%), partially offset by SG&A (46.2% vs. Cons of 45.1%). Active clients grew 17% YoY to 3.1M and was in-line with Cons of 3.12M. RevPAC grew 8% YoY to $472 beating Cons of $468. Clearly, SFIX is pursuing “high-quality” clients with greater lifetime value over rapid client growth with high potential churn. We are impressed by the GM upside, as well as the increased spend per customer, but we continue to look for acceleration of active client growth in combination with RevPAC growth. The company guided FY4Q19 Adjusted EBITDA to $5M-$10M vs Cons of $7.56M and raised the low end of their full-year Adjusted EBITDA guidance range from $33M to $38M, while maintaining the high-end of $43M. Shares were up 26% in the after-market. 

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.

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.