The company laid out the following four priorities in yesterday’s earnings release: stabilizing top-line growth, resetting their cost structure, optimizing the company’s asset base and refining their organization structure. We note the first priority represents a slight shift in strategy via prioritizing sales over profits. We think these priorities make a lot of sense but until we see meaningful progress, we are hesitant to get more constructive. In terms of the new CEO, the company noted the search remains ongoing. Given the business remains in flux, we remain sidelined. Shares are -4% in pre-market trading.
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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.
AMC on 6/12/19, LULU reported a 1Q19 adjusted EPS beat of $0.74 vs Cons of $0.70, beating on sales, comp, GM, a slightly lower tax rate, and buyback, offset by higher-than-expected SG&A. Comps were +16% vs. Cons of +11.5%.
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.
Before market on 6/5/19, AEO reported a sales and SGA-driven beat of $0.24 vs. Cons of $0.21. Comp was a big upside surprise with a +6% (all brands and channel positive) vs. Cons +3.0%. AE brand was a +4% while aerie’s business remains robust, posting a +14%. Gross margin missed and was -30 bps YoY as promos remain the predominant competitive theme at both brands. Even so, AEO is taking share. 2Q19 EPS guidance is $0.30-$0.32 vs Cons of $0.35 on +LSD comps. AE is the largest, most dominant Teen brand in North America, annualizing over $3B in sales, with Hollister (a division of ANF – UP) a distant second with ~$2B in annual sales and each of Abercrombie and Urban Outfitters (a division of URBN – OP) trailing in third with ~$1.5B in sales. Thus, we believe AE continues to be the “go-to” denim-driven brand for the Teen. Nonetheless, we believe the sector is about the enter a period of inventory overage in 2H19 and the stresses on the sector are a persistent headwind to delivering upside on a consistent basis. AEO was flat on the day despite better than expected results.
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.
Old Navy posts first negative comp in 11 consecutive quarters. AMC on 5/30/19, GPS reported a miss across all key metrics, largely due to continued slowdowns at Old Navy and Gap brand. While the Gap weakness has been a known issue for years, Old Navy’s negative comp performance is materially disappointing as we estimate ON makes up over 70% of GPS’ earnings. The company noted that merch margin was down 120 bps primarily due to ON but was partially offset by Gap brand. Said differently, the company promoted heavily at ON, while they actually pulled back on promotions at Gap brand, presumably off of historically low levels. They expect a continued promotional environment in 2Q19 and then a recovery in 2H19, which is difficult to give benefit of the doubt given recent trends. Given the level of uncertainly and disappointing performance at Old Navy, we remain PP. Shares are down 15% in pre-market trading.
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.
BMO on 5/7/19, BURL reported a $0.01 beat driven by expense control despite a miss on comp due to ongoing weakness in ladies apparel. 2QTD has rebounded with comps running in the +1% to +2% guidance range. The strategy remains in place to drive unit growth, reduce store footprint, increase sales productivity, control expenses, and expand margins. 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 potential margin expansion, we remain staunch supporters of the BURL story. On low expectations into print and improved QTD comps, BURL initially traded +10%, fading to +6% during the trading session.
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