After the market on 3/20/19, WSM reported a $0.14 beat, composed of a sales, SGA and buyback beat, offset by a GM miss. WSM reported in-line comps of +2.4% vs. Cons of +2.4%, with strong e-commerce growth offset by brick-and-mortar comps. We remain concerned about intense price competition in the home furnishings space and mid-teen online category growth that will continue to deleverage the brick-and-mortar footprint. While WSM’s brands 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. Remain cautious of long-term margin erosion and therefore reiterate Peer Perform. Stock was up 3% in after-market trading fading to up 1% pre-market open.
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The January reading plummeted, falling two rankings from December’s reading of 3/10, suggesting investors started re-shorting stocks during the January rally after being sidelined at year end. In January 45.7% of retailers posted a short position >15% (up from 39.1% in December). Since we last published this report on 12/17/18, the XRT is up 1% vs. the S&P 500 +4%. We rank Sector Sentiment on a scale of “1” being the most negative sentiment to “10” being the most positive sentiment. The basis for the ranking is based on the number of retailers in the sector with >15% short positions.
Although many companies posted sales upside for the holiday season, we think the upside is the result of deeper promotions (despite clean inventory) in order to coax consumers to shop. CPRI and TPR reported quarterly earnings last week that echoed this sentiment. Both companies cited a promotional environment, among other issues, that resulted in misses on the top-line and on gross margin vs consensus. We expect general misses to gross margin and sales given the trend of deeper promotions over the last four quarters from a peak score of 43 or “Flat” in 1Q18 to 33 or “Deeper” in 4Q18.
Heightened supply risk for 2019. During 3Q18, retailers took a turn for the worse, as inventory increased modestly at a faster rate than sales. With no ability to raise prices to drive comp, retailers must rely on increased unit volume to drive sales growth. Note that this is a snapshot entering 4Q18. Most results, save for a few exceptions (e.g., TGT – PP, COST – PP, covered by Scott Mushkin, and LULU-OP), have missed holiday sales. We expect inventory exiting 4Q18 to show even higher inventory-related business risk.
The December reading rose for the second consecutive month, suggesting with valuations pulling in short sellers may be derisking. The November reading was 2 out of 10. In December 39.1% of retailers posted a short position >15% (was 42.2% in November). Since we last published this report on 12/17/18, the XRT is up 6% vs. the S&P 500 +2%. We rank Sector Sentiment on a scale of “1” being the most negative sentiment to “10” being the most positive sentiment. The basis for the ranking is based on the number of retailers in the sector with >15% short positions.
We believe 2018 may have been “peak season” for retailers. We continue to believe in the Retail Death Curve phenomenon. The 2018 lift in mall traffic was against easy compares and pent-up demand. Despite clean inventory in 2018, there was no evidence of broad-based pricing power. Retailers were as, if not more, promotional than prior year and “bought the comp.” Tax reform savings were reinvested in store-related wages and deferred capital spending – both contributing to a higher fixed cost infrastructure than before tax reform – adding to greater deleverage risk.
It’s preannnouncement season. Post-holiday preannouncement season is here. With up to 85% of sales completed, retailers know their 4Q fate. As such, we are publishing a post-holiday promo tracker update with our call outs on upside and downside performance for the quarter. Often, the holiday success or disappointment translates into a similar outlook for the forthcoming year. With valuations pulling back in 4Q, we believe our positive call outs are worth a look ahead of 4Q18 preannouncment season and as long-term outperformers in the sector. We expect preannouncements from at least the following companies: ANF, AEO, PLCE, EXPR, CPRI, LB, LULU, ULTA, URBN, W.
Sector Sentiment 2, on a Scale of 1 (worst) to 10 (best): The November reading rose from the October reading of 1 out of 10 with 42.2% of retailers posting a short position >15% (was 44.4% in October). Since we last published this report on 11/14/18, the XRT is down 11% and therefore investors may have taken some money off the table. We rank Sector Sentiment on a scale of “1” being the most negative sentiment to “10” being the most positive sentiment. The basis for the ranking is based on the number of retailers in the sector with >15% short positions.
3Q18 Consumer Sentiment Poll scores 5. 1 out of 10 (vs 6.2 in 2Q18). Each quarter, we send out a brief survey to gauge investor sentiment prior to earnings, where 1 is “Terrible” and 10 is “Excellent.” Thanks for replying, if you did! Survey results are completely anonymous, and the greater the response rate, the more conclusive the results, so please consider participating next time.
After the market on 11/15/18, WSM reported a $0.01 beat, composed of a comp and modest GM miss, offset by SGA and buyback. After two quarters of +MSD comps, WSM reported disappointing comps of +3.1% vs. Cons of +4.0% but said demand comp, which accounts for total customer orders placed during the quarter, was +4.6%. Competition is heating up and with 15% annual growth in online home furnishings, we expect the negative impact of ongoing e-commerce growth to remain a source of deleverage. The company said the reason for the miss and 150 bps difference vs. demand comps was delays in shipments from China due to the acceleration of shipments before tariffs kick in, which mitigates risk of stock outs, but increases potential margin risk. The company noted that 15% of cost of goods sold are impacted by tariffs. WSM is the first to discuss accelerated inventory receipts, which could be yet another risk factor for the entire sector entering 2019. We believe this quarter reflects the reality that the company’s go-forward ability to take share and leverage occupancy will continue to be challenged by increasing competition in the home furnishing space. Remain cautious of long-term margin erosion; reiterate Peer Perform. Stock is down 13% in today’s trading session.
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