KAR reported Q4 on 2/18 with a call on 2/19. KAR beat on revenue but missed on EBITDA. KAR introduced FY20 guidance that was below Cons on EBITDA. Shares were +4.9% vs flat S&P 500.
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With concerns over the Coronavirus spreading, we think US Retailers will likely be viewed as near-term relative safe-haven stocks given limited direct exposure to China. However, should the virus spread into a pandemic, especially in China, we see a greater impact to US retailers from indirect supply chain exposure or US GDP growth.
To help gear up for 2020 we analyzed 2019 performance, identified 10 key themes into 2020, analyzed post Q3 earnings reaction, and analyzed the key issue facing each stock under coverage into 2020.
KAR reported Q3 on 11/5 with a call on 11/6. KAR beat on revenue but missed significantly on EBITDA and lowered the full-year guide. However, KAR only modestly lowered the implied Q4 guide, which now looks very ambitious given there’s no clear visibility to a Q4 inflection. We cut est. 9% and cut/roll our PT to $26 for CY ‘20 (was $33 in ‘19). Shares were -18%.
KAR lowered its annual guide, which is now 2% below prior Consensus at the mid-point but still implies 20% EBITDA growth in Q4!!! Even consensus was skeptical of the Q2 guide, and skeptism on this guide will be significantly greater. Unlike last quarter, it will take more than a series of one-off earnings bridges to calm the markets after stating: “volume and margin pressure drove results weaker than we anticipated”. This sentence is likely to cause another blow up.
Two weeks ago, we assumed broader coverage of Hardlines and Internet Retail and issued four deep dive reports including a downgrade of LOW to Peer Perform and reiterated HD, BBY, and W at Outperform. We also assumed coverage of AMZN, ULTA, WSM, RH, TSCO, and SHW (see our 1-page tear sheets here). Finally, we utilized the broader coverage as an opportunity to reposition our legacy auto part retail coverage and downgrade AAP to Underperform and upgraded ORLY to Outperform.
Today (10/07/19) we are assuming broader coverage of hardlines and internet retail with deep-dive reports on four companies, including a LOW downgrade to PP. We also have two ratings changes from our existing retail coverage (AAP to UP and ORLY to OP), and assuming coverage of six additional retail names with concise 1-page investment tear sheets.
Lyft: Good performance with the trees, but what about the forest?
Performance is Q2 was quite good, as a focus on better pricing and share gains for business travelers and other “high-value” routes led to better-than-expected margins. But we believe that growth in these segments is finite. Enough revenue growth to get to breakeven (from -25% EBITDA margin currently) will require Lyft to tap into the broader market, in our view. And, for that, pricing needs to go down, not up.
Takeaways from Continental earnings call
Continental is a bellwether. In our view, anyone following US suppliers should take a closer look at what they said (which we summarized in this Daily). Conti’s auto business experienced similar 1st half margin compression as suppliers we cover but they are not expecting a similar recovery in the 2nd half.
KAR reported Q2 on 8/6 with a call on 8/7. KAR beat on revenue but missed significantly on EBITDA. However, one-off items helped to explain much of the weakness. While results were disappointing relative to the high expectations set into the spin, we did take some solace in strong underlying EBITDA growth. If KAR hits 2H numbers and proves these were isolated issues, then we see considerable room to run given valuation/growth profile. We cut est. slightly but raise our CY 19 price target to $33 (was $31) on higher than expected cash post-spin. Shares -6%.
What good would a KAR quarter be without controversy? Unfortunately, this quarter was no exception. Total Rev beat Consensus by 4% and Wolfe by 3%. Total volume was in-line with our estimates with much of the difference driven by purchase accounting. Adj. EBITDA missed Cons by 8% and Wolfe by 9%. A non-recurring inventory loss at a subsidiary explains 4pts of the EBTIDA miss. Call tomorrow (08/07/19) at 11AM.
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