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Already baked into 4Q18 expectations are execution issues from unforeseen digital strength and pricing pressure. Our 4QTD checks (see Exhibits 5-8) show a flattening of YoY promos after two quarters of deeper promos. However, we believe the modest promo improvement is due to lack of inventory, and more specifically, lack of cold-weather product. We see this negatively impacting comps. Post-Christmas, our checks have shown stockouts both in stores and online of seasonally-appropriate product during some of the coldest temps of the season. We believe PLCE may have sold out of these items during the peak of holiday shopping at margin-eroding prices only to have insufficient inventory to comp in January. We note spring transitional product is being pulled up earlier to fill stores. Thus, we foresee a miss to comp (we are at +1% vs. Cons +3.3%) as well as a gross margin miss (we are at 34.3% vs. Cons at 35.6%).

Before market open 1/15/19, EXPR confirmed that “fourth quarter to date business performance is tracking within the guidance the Company issued on November 29, 2018.” However, we note the wide range of guidance that was provided post a disappointing Black Friday weekend: 4Q18 comps in the range of -5% to -7% and EPS in the range of $0.11 to $0.20. At the time of the guidance, EXPR was running below plan on both comp and margins, reflecting their disappointing outlook for holiday. For 4Q18, we forecast a -7% comp, with +15% e-commerce comp and -16% store comp. We expect inventory to continue to build into 2019, pressuring merchandise margins, and ongoing negative store comps causing fixed-cost deleverage. The stock traded essentially flat in the trading session despite a 29% short position, suggesting the report did not cause a change to negative sentiment. 

Today (1/14/2019), BMO, the company reaffirmed its 4Q18 outlook. The Company expects net sales to -MSD% with comp sales +LSD% (in-line with prior guidance), marking the 6th consecutive quarter of comp sales and up against a tough comp of 9% last year. In addition, gross profit rate should be flat to up marginally from last years 58.4% and GAAP operating expenses to be down 1-2% off last years adjusted non-GAAP operating expenses of $561 million. We are watching for building inventory at the Adult division should product issues continue into 1Q19, as well as deterioration in the European business given softness in the UK market. Reiterate Underperform as we believe valuation is still too high despite earnings normalization, and we see risk to adjusted EBIT margin target of 6% by 2020. Shares traded off -4% in reaction.

Good, but may not be good enough to dissuade shorts. The holiday comp result is being met with an aftermarket stock reaction -1.4%. A holiday comp of +5% was good, but not great as we had hoped. Although small, Europe took a turn for the worse, as did the Home category for Anthropologie, turning negative for the first time in five years. We note that the Home/Gift/Accessory category can grow to almost 40% of the holiday season but diminishes materially entering the spring season. We believe that UO brand’s comp was capped by full-price selling but delivered upside to merchandise margins with historically low levels of markdown. Anthro brand’s Home category miss was offset by reduced clearance units; merch margins should expand, albeit below plan. Free People also had unexpected modest merch margin pressure. Although more difficult 1H18 comp compares may embolden short sellers, spring is one of the strongest product seasons for all three brands. With strong brand equity, differentiated product, and a model that mitigates fixed-cost deleverage, we support URBN shares at these levels.