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.
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Yesterday (11/06/19), after market, Carvana reported Q3. After delivering a near perfect Q2, CVNA took a small step back in Retail/Wholesale $GP/U’s and SG&A (Exhibit 8), but the financing business remains strong.
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%
While we believe the street was braced for a miss on EBIT as a result of rising shipping investments, we suspect the Q4 revenue guide was lower than most were braced for. Amazon was quick to point out a historical 300bps of seasonal degradation in Q4 vs Q3; y/y), coupled with an issue with Int’l comparisons in Q4 driving an 80bps headwind vs a 40bps tailwind in Q3. The 4Q19 guide implies EBIT% of 2.5% at the mid-point (-270bps y/y vs prior Street estimates of -40bps y/y). Even though the shipping investment headwinds have been more or less digested by investors at this point, the magnitude of the 4Q guide down will likely pressure the stock.
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.
We are assuming and reiterate Wayfair with an OP and a $145 CY 2020 price target, leaving 36% upside vs. current prices. We value Wayfair using a DCF model backed by our long-term blue-sky estimates. Our PT embeds a 1.0x EV/NTM sales multiple vs. current 0.9x.
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