We are withdrawing coverage on Zumiez Inc., as we are reallocating resources elsewhere. Our final rating of Peer Perform, price target and estimates should no longer be relied upon.
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Quarterly EPS Upside: COH, GPS, PLCE, KORS; Quarterly EPS Risk: BBBY, CHS, URBN, WSM. 2QTD promos (and therefore margins) appear worse YoY vs. 1Q17; expect another quarter of weak topline, low-quality EPS, and lowered 2H guidance. Promos QTD remain generally “Flat-to-Deeper” YoY despite efforts to keep inventory tight. With mall traffic still negative, the appetite for apparel remains anemic. Consumers only shop when there is a major traffic- driving holiday, such as July 4th.
The Wolfe Retail Monthly Short Report is published using the end-of-month reported short interest positions. Our Retail Monthly Short Report helps to gauge sentiment on individual stocks. In this report, we show two metrics 1) short interest shares as a percent of float and 2) short interest share change month-over-month for the last twelve month period. Given the increasing volatility in the sector, particularly ahead of earnings reports, we believe tracking short interest in concert with recent stock price moves relative to valuation is another useful tool to gauge near-term investor sentiment.
Week 9 was the week leading up to July Fourth; retailers drove traffic with promos. Promos QTD remain “Flattish” compared to last year’s very aggressive promotions, despite all efforts across the sector to keep inventory supply tight. This suggests the demand environment remains challenging and the appetite for apparel remains anemic. Consumers are only coming out to shop when there is a major holiday, such as July Fourth, but between traffic-driving events, we see ongoing weakening demand.
Apparel Sector grade: C+ in 1Q17 (from B+ in 4Q16). Only 41% of covered retailers posted a positive sales-to-inventory spread in 1Q17. Supply (inventory) management is no longer yielding gross margin expansion. Given that mall traffic (demand) remains in a multi-year decline, even with “clean” inventory at the beginning of a quarter, slack demand has been resulting in margin-eroding clearance. We note excess supply of 1) absolute number of retail stores/square footage & 2) number of retail concepts targeting the same consumer. A sales-to-inventory spread at parity is only supportive of margins insofar as future demand is, at worst, flat, but hopefully improving. When demand further erodes from the time at which a retailer placed inventory orders, we call this “chasing the ball downhill.”
ZUMZ reported a June comp beat of +5.3% vs. the Retail Metrics Consensus of +1.1% and raised 2Q17 guidance. June comp accelerated nicely into the +MSD range and beat expectations as well as the two year stack. Comp growth continues to be driven by positive transaction growth and growth in average unit retail, offset slightly by lower average dollar sales and units per transaction YoY. Men’s and Junior’s continues to be a point of strength, while Hardgoods, Accessories, and Footwear saw negative comps in June. As a result of the comp strength, management raised 2Q17 comp guidance from 1%-3% to 3%-4% with LPS (loss per share) from ($0.11) to ($0.06) to ($0.08) to ($0.06) with Consensus at ($0.08). In reaction, ZUMZ traded up ~7% in the after-hours session.
Week 7 out of 13-week quarter; Post-Memorial Day lull sets in ahead of July 4th. Promos QTD remain flat-to-deeper compared to last year’s very aggressive promotions, despite all efforts across the sector to keep inventory supply tight. This suggests the demand environment remains challenging and appetite for apparel remains anemic. Clearly, we have seen retailers cutting inventory, only to lose marketshare while still resorting to promotions to drive traffic. This is resulting in ongoing pressure to merchandise margins. Healthier full-price selling without the associate marketshare gains (i.e., positive comps) are largely a game of “running in place,” in our opinion. Investors have not rewarded retailers that have posted improving merchandise margins at the expense of negative comp sales. With half of 2Q17 complete, we note that the past three consecutive weeks in June have shown an increase in promotional activity, suggesting even with summer break, warmer weather, and the end of school, it remains difficult to spur sales.
Memorial Day promos were largely “Flattish” to LY. Promos QTD are largely flat to last year’s very aggressive promotions despite all efforts across the sector to keep inventory supply tight. Clearly, we have seen that retailers are cutting inventory only to lose marketshare, but are trying to pull back on promotions to support merchandise margins. Healthier full-price selling without the associate marketshare gains (i.e., positive comps) are largely a game of “running in place,” in our opinion. Investors have not rewarded retailers that have posted improving merchandise margins at the expense of negative comp sales.
AMC on 6/1/17, ZUMZ reported 1Q17 earnings beat of -$0.18 vs. Consensus of -$0.20 driven by better-than-expected sales, comp, GM, and SG&A. 1Q17 comp was already announced at +1.8%, just below the high end of the range of flat to +2%. We continue to applaud ZUMZ for driving a third consecutive quarter of positive transactions, amidst a negative traffic backdrop. While transactions were up, ticket was down driven by lower units per transaction, offset by growth in average unit retails. Despite gaining share in 1Q17 amidst a troubled retail environment, 2Q17 guidance came in significantly below Consensus (EPS guidance of -$0.11 to -$0.06, vs. Street at +$0.01). This guidance is based on anticipated comps of 1% to 3% range. Shares traded down ~9% in aftermarket trading.
A sector shunned. Retail investors remain highly risk averse and appear to be pressing shorts and taking profits on strength. Top-line misses and soft guidance are being met with double-digit selloffs, while incrementally positive data points are, at best, flat as investors exit the sector. Sector Sentiment remains a 1 (worst) out of 5. In our recent 1Q17 proprietary investor poll, 92% of investors registered a negative sentiment, up from 81% in 4Q16.
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