Recent rumblings of excess inventory growth have pressured the stock down ~9% in one week. Mid-day Tuesday, a store channel check report suggested heavy inventory levels flowing into stores. Based on our store checks, this is true – new, full-price flows of early/transitional back-to-school merchandise are indeed flowing into stores. The new flows are coincident with the biggest traffic driving portion of the quarter and the “Monster Sale” promo. To be sure, we will be watching promos in July like a hawk. Admittedly, weather is not great, but then again management expected a tough 2Q19 with demand pulled forward into 1Q and tough compares. With a 38% short position, what appears to be typical inventory cadence is being interpreted as inventory risk. We disagree. We believe what we are seeing is the in-store preparation for the high-traffic portion of the quarter and the earlier flows management discussed and planned for on the call.
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AMC on 6/12/19, LULU reported a 1Q19 adjusted EPS beat of $0.74 vs Cons of $0.70, beating on sales, comp, GM, a slightly lower tax rate, and buyback, offset by higher-than-expected SG&A. Comps were +16% vs. Cons of +11.5%.
SFIX beat the quarter on sales, RevPAC, gross margin and $0.09 from better-than-expected taxes. The company reported Adjusted EPS of $0.07, beating Cons of ($0.03). The beat was the result of better sales ($408.9M vs. Cons of $395.1M) and gross margin (45.1% vs. Cons of 44.0%), partially offset by SG&A (46.2% vs. Cons of 45.1%). Active clients grew 17% YoY to 3.1M and was in-line with Cons of 3.12M. RevPAC grew 8% YoY to $472 beating Cons of $468. Clearly, SFIX is pursuing “high-quality” clients with greater lifetime value over rapid client growth with high potential churn. We are impressed by the GM upside, as well as the increased spend per customer, but we continue to look for acceleration of active client growth in combination with RevPAC growth. The company guided FY4Q19 Adjusted EBITDA to $5M-$10M vs Cons of $7.56M and raised the low end of their full-year Adjusted EBITDA guidance range from $33M to $38M, while maintaining the high-end of $43M. Shares were up 26% in the after-market.
Before market on 6/5/19, AEO reported a sales and SGA-driven beat of $0.24 vs. Cons of $0.21. Comp was a big upside surprise with a +6% (all brands and channel positive) vs. Cons +3.0%. AE brand was a +4% while aerie’s business remains robust, posting a +14%. Gross margin missed and was -30 bps YoY as promos remain the predominant competitive theme at both brands. Even so, AEO is taking share. 2Q19 EPS guidance is $0.30-$0.32 vs Cons of $0.35 on +LSD comps. AE is the largest, most dominant Teen brand in North America, annualizing over $3B in sales, with Hollister (a division of ANF – UP) a distant second with ~$2B in annual sales and each of Abercrombie and Urban Outfitters (a division of URBN – OP) trailing in third with ~$1.5B in sales. Thus, we believe AE continues to be the “go-to” denim-driven brand for the Teen. Nonetheless, we believe the sector is about the enter a period of inventory overage in 2H19 and the stresses on the sector are a persistent headwind to delivering upside on a consistent basis. AEO was flat on the day despite better than expected results.
Old Navy posts first negative comp in 11 consecutive quarters. AMC on 5/30/19, GPS reported a miss across all key metrics, largely due to continued slowdowns at Old Navy and Gap brand. While the Gap weakness has been a known issue for years, Old Navy’s negative comp performance is materially disappointing as we estimate ON makes up over 70% of GPS’ earnings. The company noted that merch margin was down 120 bps primarily due to ON but was partially offset by Gap brand. Said differently, the company promoted heavily at ON, while they actually pulled back on promotions at Gap brand, presumably off of historically low levels. They expect a continued promotional environment in 2Q19 and then a recovery in 2H19, which is difficult to give benefit of the doubt given recent trends. Given the level of uncertainly and disappointing performance at Old Navy, we remain PP. Shares are down 15% in pre-market trading.
Today (5/29/2019) BMO, ANF reported an EPS beat on higher than expected sales and lower than expected SG&A. The company’s two core brands traded places in terms of comps with Abercrombie brand beating Cons of -1.5% with a comp of +1%, while the Hollister missed Cons of +3.4% with a comp of +2%. Hollister’s US business remains robust and the miss was due to Asia and Europe weakness. Our long-term Underperform thesis remains unchanged with deleverage persisting, 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. Reiterate Underperform as we believe Teen space remains highly competitive and will continue to lack substantial pricing power. On the miss and lower than expected 2Q guidance, shares traded down 27% on the day.
We believe the trio of CPRI brands resonates with each of their respective target markets and provides both product and geographic diversity across the portfolio. This diversification will lower CPRI’s business risk over the longer-term once they successfully integrate the acquisitions. Additionally, each brand’s category expertise provides significant opportunity for product extensions to drive growth. While FY20 is an investment year, the market share and operating leverage opportunities should be evident in FY21 and beyond. We believe in the strength of the luxury segment and CPRI’s brand portfolio and believe shares are undervalued for a multi-year horizon investor.
AMC on 5/22/19, LB reported 1Q19 earnings beat but provided weak 2Q19 guidance despite raising the low-end of their FY19 EPS guidance. Bath & Body Works reported a +13% comp vs. Cons of +5.2% and an increase in their merch margin, while VS reported a -5%, in-line with Cons of -4.9%, and a continued decline in their merch margin with ongoing struggles as the PINK fared worse than VS brand. Clearly, BBW continues to outperform while uncertainty remains with resurrecting VS. Even with a product overhaul for fall, we see little to no visibility on customer uptake at this point. With a cheap valuation deep value investors may find LB of interest; however, we have little to no evidence of sustained change at VS, we remain sidelined. We look for improved VS’ gross margin before becoming more optimistic since full-price selling means consumers are returning and product is resonating. In reaction to the beat, LB shares were up 14% in early-morning trading.
The quarter commentary brought a clear shift in strategy with FY19 as a year of investments: 1) new subscription business Nuuly, 2) new furniture distribution center in early fall, 3) new European home office in 3Q19, 4) construction of a new distribution facility in Europe, and 5) incremental talent for China T-mall local launch. During investment phases, companies face heightened business risk and results become extremely sensitive to deleverage risk. As such, shares often languish. Trading at 10x NTM P/E, near valuation lows, URBN reflects the uncertainty and risk that accompanies an investment year. With investments to build a robust 360 degree platform, we maintain our Outperform, although concede trading is likely rangebound until there is proof of concept and positive ROI on the new initiatives. Shares trading -7% in reaction.
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