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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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.
We expect the trends of a highly promotional holiday combined with heavy-up investments, ongoing negative comps and continued roll out of Beyond+ to continue to cause material margin erosion for the next couple of years. We also see the challenges of the highly-branded nature of BBBY’s product offering as another headwind since it is not exclusive to them. Long-term, we see the store footprint as a major problem that remains in the very early stages of resolution and expect another material round of store closures in 2019. Reiterate Underperform
After delivering three consecutive quarters of best-in-class fundamental performance, URBN shares are trading -5% YTD as investors shed shares. At issue is the ability to comp the comp beginning in FY1Q19. With many names pulling back, we looked across our universe for the optimal combination of 1) increased visibility on cash flow growth, 2) improving return metrics, and 3) reduced risk as measured by attractive valuation metrics. We lay out five reasons that sum up our thesis which are detailed further in the note.
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.
We recently initiated at Peer Perform with a cautious bias after the disappointing outlook last quarter. This quarter’s outlook does not dissuade us from our cautious stance, but given the sell-off, shares may be momentarily derisked. Three key metrics are mission critical to an early-stage consumer growth story, namely 1) active client growth, 2) net revenue per active client (“RevPAC”), and 3) cost to acquire customers. On 12/10/18 after market, SFIX reported an EPS beat of $0.10 (Cons $0.03). The outlook on key metrics disappointed though sending shares -21% in the after market. Reiterate Peer Perform with cautionary bias on the risk of continued slowing growth in active clients.
After market close (12/11/18), AEO reported a 3Q18 that missed on sales, comp, gross margin and SG&A. The lack of flow through was due to $40 million of lost sales due to the calendar shift. Comps remain positive in both brick-and-mortar (+6%) and e-commerce (+mid-teens). A below-Cons 4Q18 guide disappointed despite continuing to take share with a +MSD comp guide. 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. AEO shares are -5% in the aftermarket in reaction.
After market on 12/10/18, URBN filed its 10-Q. In the Management's Discussion & Financial Analysis, URBN commented on consolidated QTD comparable retail segment trend, “Thus far during the fourth quarter of fiscal 2019, comparable retail segment net sales are running mid-single-digit positive.” With just over one month completed, we choose to maintain our 4Q18 comp estimate of +5.0% (Cons +5.1%) and our 4Q18 EPS of $0.82 (Cons $0.81). The quarter is patterning as expected, with Black Friday/Cyber Monday results driving upside to a +MSD comp, and the post-Black Friday lull giving some of that upside back. We forecast URBN 4QTD retail segment comp to be +5%. We also note that UO brand had comp pressure in December from weak tech and media performance LY that has been resolved this holiday season and could result is modest improvement.
After market on 12/10/18, we expect URBN to file its 10-Q. We expect another solidly positive comp report, but do not expect a material acceleration from the +MSD guidance provided on their most recent earnings call. In fact, 4QTD, our proprietary promo checks show URBN consolidated promo levels are running “Deeper” to LY (see Exhibits 4-10 on pages 5-7), corroborating a highly promotional environment. We note however that promotions at UO are “Flat” but UO was the only brand we follow that was “Better” YoY during Black Friday/Cyber Monday weekend in our entire tracking universe. For UO, recall last year this brand had a material comp deceleration in December due to its tech and media categories as well as margin pressure from incurring expensive digital marketing during the peak pre-Christmas season. Anthropologie and FreePeople are “Deeper” QTD; we note “Deeper” promotions were mostly on clearance vs. full-line. Still, we are keen to see any inflections in promotions for each of these brands during the rest of the quarter. In the Management's Discussion & Financial Analysis, URBN comments on consolidated QTD comparable retail segment trend. We expect commentary similar to: “Thus far during the fourth quarter of fiscal 2019, comparable retail segment net sales are running mid-single-digit positive.” With only one month completed, we choose to maintain our 4Q18 comp estimate of +5.0% (Cons +5.1%) and our 4Q18 EPS of $0.82 (Cons $0.81).