Following recent earnings reports across restaurants, leisure, and hardlines retail, we are publishing updated estimates and price targets for each of the following: Brinker International (EAT), Brunswick (BC), Chipotle (CMG), Domino’s Pizza (DPZ), Dunkin’ Brands (DNKN), Harley-Davidson (HOG), McDonald’s (MCD), O’Reilly Automotive (ORLY), Polaris (PII), Restaurant Brands Int’l (QSR), Starbucks (SBUX), Tractor Supply (TSCO), and YUM! Brands (YUM), Amazon (AMZN).
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Last night after the market close, Amazon (AMZN) announced Q1 results highlighted by a sharp top-line acceleration amid a surge in demand that began in early March. AMZN is planning to funnel all, if not more, of expected Q2 sales strength (upwards of +28% year-over-year) into ~$4B of COVID-related costs - a figure that may flex depending on the trajectory of the quarter and per our follow up discussion with the company. This along with higher fulfillment costs should weigh substantially on Q2 operating profitability.
We are assuming coverage of Amazon (AMZN) with an Outperform rating and installing a $2,600 price target on shares. AMZN is the clear leader in global eCommerce and has made significant strides in its highly cash generative cloud computing platform, allowing for further investment across all aspects of the business. Our interpretation of recent results indicates that Prime one-day shipping is re-accelerating broad-based sales growth - a particularly impressive feat given the scale at which Amazon now operates. We view the company’s quick addition of 100K employees and plans to hire another 75K as clear signals of unprecedented demand post COVID-19. AMZN should benefit from consumers staying at home with the potential for order frequencies to remain elevated for an extended period amid greater online shopping adoption. In an overall choppy environment we expect investors to gravitate towards the somewhat safer secular growth AMZN offers.
Thursday PM (1/30), AMZN reported Q4 results, beating on revenue and margins across each of its three segments. On a consolidated basis, AMZN beat revenue by 1.5% and margins by 130bps. AMZN also provided Q1 2020 guidance, which came in 1% below consensus for revenue and 60bps below for margins even with a favorable adj. to depreciation lives. Shares were +7% Friday versus S&P of -2%.
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.
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.
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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