Following recent earnings reports across leisure, food retailers, and hardlines retailers, we are publishing updated estimates and price targets for each of the following: Norwegian Cruise Lines (NCLH), Royal Caribbean Cruises (RCL), Walmart (WMT), Sprouts Farmers Markets (SFM), Advance Auto Parts (AAP), AutoZone (AZO), Home Depot (HD), Lowe’s (LOW), Wayfair (W).
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Earlier today (5/5/20), Wayfair (W) reported Q1 results following the company’s April 6th business update and highlighted a surge in demand with gross revenues up roughly +90% thus far into Q2. Consolidated adjusted EBITDA is now expected to turn positive in Q2 as internal efforts to better control costs take hold, accelerated by incremental revenue post COVID-19. Management indicated the quick pivot to nearer-term profitability is not a direct result of heightened demand lately, but predicated on aggressive efforts put into effect late last year to drive sustained profitability - which would most likely have driven positive EBITDA in a +20% sales growth environment.
W reported Q4 results that met on revenue but slightly missed on EBITDA margins (by 22 bps). The guided deceleration in revenue and messaging on advertising refinements overwhelmed a commitment to turn US run-rate profitable by end of 2021. Stock was -18%
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.
W reported Q3 results with a slight beat on revenue (by 1%) and active customers (by 1%) but missed on EBITDA margins (by 20 bps). While the print was largely okay, the Q4 guide was very soft, with revenue coming in 6% below consensus and EBITDA margins declining 100bps sequentially and 450bps y/y. Mgmt. blamed guidance on tariff volatility. Stock was -19%
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.
Wolfe Research's Senior Hardlines & Internet Retail Analyst Chris Bottiglieri hosted a webcast to discuss his downgrades of AAP and LOW, bottom-up TAM analyses on both home improvement retail and auto parts retail, his valuation black box: what is driving retail valuations, and more.
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.
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