Uniquely positioned to win. Over the next decade, ULTA is uniquely positioned to capitalize on 1) demographic trends (e.g., Millennials, Gen Z, minority population growth), 2) Beauty segment trends, 3) social media trends, 4) consumer behavioral trends and 5) incremental digital sales growth. The 4Q18 report showed a return to top-line growth, driven primarily by accelerating transaction growth. For the second quarter in a row, comp was driven by transactions which outpaced ticket growth. We believe ULTA is prudently investing in critical infrastructure as they grow. We continue to view ULTA as a secular winner benefitting from Millennial beauty buying behavior. Reiterate Outperform.
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An Iconic Platform Launch. We recently visited the NYC Kate Spade flagship with TPR management, including EVP, President of Kate Spade North America and Head of Global Merchandising Emilia Fabricant; Interim CFO Andrea Resnick; VP Investor Relations Christina Colone; as well as members of the Kate Spade field and store organization. We came away with renewed conviction in the new Kate Spade platform launch (rather than simply a new product launch). Platform launches reposition a brand for the long-term. In this note, we showcase photos of the new product, which was made available in stores in early February. The story is about the forward merchandise under new creative director Nicola Glass. We estimate that by the end of March ~50% of the product will be new (accounting for ~25% of FY3Q19 sales) and will build to 100% new product by the end of June (accounting for ~75% of FY4Q19 sales).
Business in flux. With material deterioration in comp, e-commerce growth, margins, and customer resonance, we remain Peer Perform. We expect lack of buying interest until a new CEO is named, a new strategy outlined, or business performance picks up. However, we note EXPR has ~$2.50/share in cash and no debt and can likely ride out volatile performance. We see no immediate fix to the issues but continue to monitor EXPR’s progress as we also see little risk of liquidity issues in the near-term. With negative margins, small “wins” can result in recovery with meaningful stock implications.
In FY2Q19, two critical key metrics delivered surprise upside and are drivers of future growth: 1) active clients of ~3M (Cons 2.95M) up 18% YoY and 2) RevPAC of $463 (Cons $467) up 6.1% YoY. Retained customer drove 88% of revenues and the strength of this customer segment resulted in the ability to push an incremental $15 million in brand spending into FY3Q19. After market on 3/11/19, SFIX reported FY2Q19 EPS of $0.12 vs Cons of $0.05. Shares surged 25% during the trading session.
Before the market open today (3/12/19), DKS reported a slight EPS beat of $1.07 vs Cons of $1.06. Comp of -2.2% beat Cons of -3.3%. E-commerce grew 17% YoY during 4Q18. Gross margin missed Cons of 28.8% by 100 bps and fell 170 bps YoY. SG&A came in better than expected vs. Cons 23.2% by 100 bps and was flat YoY. During the quarter the company bought back $33.7M of shares. The company expects strategic investments of $60M during FY19, specifically $35M to enhance the store experience, $15M to improve e-com fulfillment and $10M in technology. The company plans to eliminate $30M of expenses to fund half of the investment. Still, we hesitate to recommend shares due to this increase in investment that will weigh on margins and brick-and-mortar comps that remain negative (we estimate -9% brick-and-mortar comp for 4Q18, Exhibits 4-5). Reiterate Peer Perform. In reaction to the report, DKS traded down 11%.
ANF continues to defy expectations. BMO on 3/6/19, ANF delivered another solid quarter on higher than expected comps and better than expected gross margin. Hollister remains on track with a 6% comp on top of an 11% comp last year, while A&F brand's comp inflected negatively due to weakness in women's tops and dresses. In addition, brick-and-mortar comps remained negative this quarter. As such, our long-term Underperform thesis remains unchanged, as we are hard pressed to see the company inflect back to positive brick-and-mortar comps across the chain without the reliance of discounting over the next few years. In addition, with fixed costs for the sector on the rise, we see future risk to margins and note Teen competitors (both online and offline) continue to pressure pricing. Reiterate Underperform as we believe Teen space remains highly competitive and will continue to lack substantial pricing power. ANF is up 21% since reporting 4Q18 earnings BMO on 3/6/19.
A rare miss on top-line. BMO on 3/7/19, BURL reported an beat on Adjusted EPS driven by SG&A while missing Cons on top-line and gross margin. The company missed on the top-line due to disappoints in the cold weather and heritage ladies categories. The company believes the recent cold weather will rectify the cold weather apparel issue and plans more conservative sales from the heritage ladies category over the near term. Nonetheless, we continue to believe in the 1) resilience of the Off-Price model 2) BURL’s ability to gain market share in a highly promotional sector and 3) ability to drive store traffic despite the accelerating adoption of e-commerce. With over 40%-unit growth ahead and 400-600 bps of potential margin expansion, we remain staunch supporters of the BURL story. On the low-quality beat and disappointing guide, BURL traded down 12% yesterday (03/07/19).
AMC on 3/6/19, AEO reported a low-quality beat and disappointing guidance. Still, the company continues to positively comp at both AE and aerie. In particular, aerie continues to take market share with a comp of 23%. As a result, the company plans to open 60 to 75 stores in FY19. AE continues to benefit from market share growth in jeans becoming the number one retailer in women's jeans (still number two in men's) and passing $1 billion in jeans sales during 2018. Although the company continues to grow, 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. Shares of AEO were down 1% in yesterday's trading.
4Q18 in-line EPS; REQ Score 6/10. AMC on 3/5/19, ROST reported in-line EPS of $1.13 vs. Cons of $1.13 on a reported +4% comp vs. Cons of +2.3% driven by a combination of higher traffic and an increase in the average basket. The company noted that men’s was the best performing category while ladies underperformed during the quarter. The company missed on gross margin by 20 bps vs. Cons of 27.4%. The company beat on SG&A in terms of Cons despite deleveraging 40 bps YoY due to previously mentioned wage investments. The company repurchased 3.1M shares during the quarter for $268M. Although freight and wage costs may pressure margins in the near-term, over the long-term we believe the off-price model will continue to be successful, especially when considering consumer backdrop may be peaking and off-price model is defensive and even more valuable in weaker economic environment. Shares traded down 2% in the two day’s since ROST reported AMC on 3/5/19.
With mall traffic down, consumer malaise, and weather disruption, all brands are below expectations thus far in 1Q19. We continue to believe in the product offering and strength of trend underlying the product at the URBN brands, but clearly note the tough compares will keep a lid on shares until 2H. We continue to believe in attractive risk/reward at these levels but are revising our EPS downward based on early indications of a weakening consumer backdrop.
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