After the market on 1/15/19, JWN reported a comparable sales increase of 1.3% for the holiday period. In Full-Price, comparable sales increased +0.3%, reflecting softer traffic in stores. In Off-Price, comparable sales increased 3.9%, with digital sales up 18% YoY, representing 36% of sales. Given the missed plan at full-price, the anniversary sale will result in gross margin pressure in order to move inventory. We believe the trends in full-price mall traffic will remain under pressure as consumer behavior shifts online. Like so many other traditional department stores and broadline retailers, JWN will need to invest in services that cater to the consumer’s demands for transaction that are inherently margin-eroding.
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Already baked into 4Q18 expectations are execution issues from unforeseen digital strength and pricing pressure. Our 4QTD checks (see Exhibits 5-8) show a flattening of YoY promos after two quarters of deeper promos. However, we believe the modest promo improvement is due to lack of inventory, and more specifically, lack of cold-weather product. We see this negatively impacting comps. Post-Christmas, our checks have shown stockouts both in stores and online of seasonally-appropriate product during some of the coldest temps of the season. We believe PLCE may have sold out of these items during the peak of holiday shopping at margin-eroding prices only to have insufficient inventory to comp in January. We note spring transitional product is being pulled up earlier to fill stores. Thus, we foresee a miss to comp (we are at +1% vs. Cons +3.3%) as well as a gross margin miss (we are at 34.3% vs. Cons at 35.6%).
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.
Before market open 1/15/19, EXPR confirmed that “fourth quarter to date business performance is tracking within the guidance the Company issued on November 29, 2018.” However, we note the wide range of guidance that was provided post a disappointing Black Friday weekend: 4Q18 comps in the range of -5% to -7% and EPS in the range of $0.11 to $0.20. At the time of the guidance, EXPR was running below plan on both comp and margins, reflecting their disappointing outlook for holiday. For 4Q18, we forecast a -7% comp, with +15% e-commerce comp and -16% store comp. We expect inventory to continue to build into 2019, pressuring merchandise margins, and ongoing negative store comps causing fixed-cost deleverage. The stock traded essentially flat in the trading session despite a 29% short position, suggesting the report did not cause a change to negative sentiment.
Today (1/14/2019), BMO, LULU raised their guidance for 4Q18 post stellar holiday results. The company now expects sales in the range of $1.140 billion to $1.150 billion based on a total comparable sales increase in the mid-to-high teens on a constant dollar basis. This compares to prior guidance of net revenue of $1.115 billion to $1.125 billion based on a total comparable sales increase in the high-single to low-double digits on a constant dollar basis. As a result of the higher than expected sales, the company expects EPS in the range of $1.72 to $1.74 for the fourth quarter (Cons of $1.69) vs. previous guidance of $1.64 to $1.67. Another quarter of full-price driven sales, as they engage current and new customers with product innovation and category and geographic expansion. We expect to hear color on the next three-year long range plan with a spring investor event/update. Reiterate OP. As a result of the update, shares are +6%.
Today (1/14/2019), BMO, the company reaffirmed its 4Q18 outlook. The Company expects net sales to -MSD% with comp sales +LSD% (in-line with prior guidance), marking the 6th consecutive quarter of comp sales and up against a tough comp of 9% last year. In addition, gross profit rate should be flat to up marginally from last years 58.4% and GAAP operating expenses to be down 1-2% off last years adjusted non-GAAP operating expenses of $561 million. We are watching for building inventory at the Adult division should product issues continue into 1Q19, as well as deterioration in the European business given softness in the UK market. Reiterate Underperform as we believe valuation is still too high despite earnings normalization, and we see risk to adjusted EBIT margin target of 6% by 2020. Shares traded off -4% in reaction.
Before market open (1/14/2019), the company provided a 4Q18 update, announcing QTD comp sales +6%, up against an +8% in the prior year and reaffirmed EPS guidance of $0.40 to $0.42. The company repurchased an additional 4 million in shares totaling 7.3 million for the year ($144 million). AEO shares reacted positively, jumping +4% at the open but fading throughout the day to flattish. At issue was the reiteration of the range despite delivering upside to Cons 4Q18 comp of +5%. Our promo checks during holiday suggested essentially flat promos at AE Brand to LY but slightly deeper promos at aerie, likely to compete effectively with struggling VS and Pink brands. The Teen segment remains among the most price competitive, and although we believe American Eagle and aerie are dominant in their respective categories, the lack of sustained pricing power in a deflationary segment keeps us sidelined. Reiterate Peer Perform.
Good, but may not be good enough to dissuade shorts. The holiday comp result is being met with an aftermarket stock reaction -1.4%. A holiday comp of +5% was good, but not great as we had hoped. Although small, Europe took a turn for the worse, as did the Home category for Anthropologie, turning negative for the first time in five years. We note that the Home/Gift/Accessory category can grow to almost 40% of the holiday season but diminishes materially entering the spring season. We believe that UO brand’s comp was capped by full-price selling but delivered upside to merchandise margins with historically low levels of markdown. Anthro brand’s Home category miss was offset by reduced clearance units; merch margins should expand, albeit below plan. Free People also had unexpected modest merch margin pressure. Although more difficult 1H18 comp compares may embolden short sellers, spring is one of the strongest product seasons for all three brands. With strong brand equity, differentiated product, and a model that mitigates fixed-cost deleverage, we support URBN shares at these levels.
Yesterday (01/09/19), after market close, BBBY reported 3Q18 EPS of $0.18 aided by one-time tax benefits (Cons $0.18). The company missed on sales, comp, and gross margin, slightly offset by better-than-expected SG&A. The company reported comp of -1.8% vs. Cons of -0.3%. Gross margin was 50 bps lower than Cons and down 210 bps YoY. FY18 guidance is $0.01 above prior Cons, with EPS now near $2.00 (Cons $1.99). Notably, the company said they believe FY19 EPS will be about the same as FY18. We believe this will be challenging given the structural shift to omni and further margin deterioration as Beyond+ increases in penetration. We reiterate our Underperform and believe promotions and fixed cost deleverage will persist until the pace of store closures accelerates meaningfully. On the comments about FY19 EPS and with a 25% short position, shares are +16% today.
Wolfe Research's Senior Consumer Research Analyst, Adrienne Yih, hosted a webcast to discuss 2019 outlook, cost inflation pressures, preannouncement expectations, holiday results - winners and losers, and best long and short ideas.
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