Wolfe Research's Senior Consumer Research Analyst, Adrienne Yih, hosted a webcast to discuss how rare this competitive backdrop is, questions for management, how achievable the 1H and 2019 guidance are, what current QTD promo trends look like, the value of Gymboree assets, sensitivity accretion analysis, and where investors could be exposed to the downside.
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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.
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.
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.
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.
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