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.
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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.
Rare is the setup that lies in front of PLCE. After hastening Gymboree's demise, PLCE possesses perfect information on their once formidable specialty competitor. They now have Gymboree's customer file, IP, and a detailed map of where the highest return market opportunities lie. Secondarily, PLCE has ensured this information cannot be used against them by another competitor.
We already know that URBN reported 4Q18 comps of +3% missing the then Cons of +4.5%. We believe merchandise margins were up at all three brands, but Anthro missed expectations for greater product margin recovery due to weakness in Home. Checks 1QTD show controlled, on-plan promotional activity at UO and Free People brands, but our checks show a clear continued pattern of Deeper promos QTD for Anthro. We are noting weakness in Home as well as a potential miss in the dress category within apparel. We perceive the Anthro weakness to be suggestive of a potential negative comp for the spring quarter as they work through issues to remedy product category misses. Based on our now-expected negative low-single-digit Anthro comp, and a generally tough start given weather issues, we lower our comps in 1Q and 2Q to slightly negative territory.
Reiterate Peer Perform so long as store comps are negative. We note e-commerce grew to 30% of sales, implying a still-negative mid-single-digit brick-and-mortar comp. We remain sidelined as department stores undergo the margin-eroding shift to e-commerce over the longer-term, full-price comp slows and normalized compares become increasingly challenging to lap. JWN must navigate the omnichannel shift where we believe operating margins may remain stagnant over a multi-year period.
Unsure yet of value creation. AMC on 2/28/19, GPS, in addition to 4Q18 earnings, announced a plan to split into two publicly traded companies, Old Navy and "NewCo" that consists of the other brands. We believe Old Navy stand-alone operating margins are in the mid-to-high-teen range, BR in the high-single-digit range and Gap currently in the negative low-single-digit range. Once Gap closes 230 worst performing stores (comp, 4-wall, and cash flow), we expect Gap brand margins to be in the mid-single digits. We understand the rationale to extract the proper valuation for a standalone Old Navy but are uncertain about the recovery strategy for the NewCo brands. Given the level of uncertainly and recent disappointing holiday performance at Gap and Old Navy, we take a sidelined position. What we are certain of is the immediate comp lift and margin impact of the 230 store closures. Though there will be annualized sales loss of $625M and pre-tax (mostly cash) costs of $250-$300M, EBIT will lift by $90M. After the closures, the company expects 40% off sales coming from online. Shares are up 16% on the day.
We expect a miss to comp (we are flat vs. Cons +3.0%) as well as gross margin (we are at 34.3% vs. Cons at 35.1%). PLCE will report 4Q18 results in late March.
Steps in the right direction but still more work to do. AMC on 2/17/19, LB reported 4Q18 earnings beat but provided weak 1Q19 and FY19 guidance. We note LB has taken steps in the right direction with the closure of Henri Bendel, the sale of La Senza, cutting their dividend in half, new leadership at VS lingerie and Pink and a planned 3% reduction in VS square footage in FY19. Still, much uncertainty remains with resurrecting VS’ brand image. Rarely do we see the initial pass of turn work without further tweaking of the strategy, and things could get worse before getting better. We look for improvement in VS’ gross margin before becoming more optimistic since full-price selling means consumers are returning and the product is resonating. In reaction to ongoing struggles, LB shares were down 7% midday.
Underpromise, overdeliver. Another solid holiday performance with all concepts gaining share and customer loyalty. Strong merchandising, higher brand penetration, and a calculated bet on the holiday toy category all drove sales, ticket, and merchandise margins. While the new generation of shoppers shuns the tired on-mall experience, when presented with such compelling value (defined as quality for price), shoppers will frequent a brick-and-mortar store. We further note that TJ Maxx’s e-commerce channel has 100% unique product from the stores, significantly reducing cannibalization risk. After success with TJ Maxx, Marshalls will launch an e-commerce site in 2019. After setting cautious EPS growth expectations for 2019 on their 3Q18 earnings call, investors were relieved to see a return to double-digit EPS growth beyond 1Q. With strong cash flow, increased dividends and share repurchases, and one of the highest ROICs in retail, we reiterate OP.