We updated our SIGMA book of 176 companies in the retail supply chain – For Link to the Full Book PDF: CLICK HERE
The SIGMA (Sales Inventory Gross Margin Analysis) triangulates the quarterly (or halves in case of certain international companies) sales to inventory growth spread with the EBIT margin change. Covid introduced unprecedented volatility into sales vs inventory spreads and margin change trends, so the charts observe abnormally large swings. Given the comparisons this most recent quarter, the vast majority of companies saw a bearish move downwards and to the left similar to the aggregate industry. When we use this as a screening tool, we’re looking at the latest quarter's quadrant, the direction and magnitude of the shift, and the upcoming comparisons to flag bullish and bearish moves. Generally, the most bearish move is a shift from Quad 2 down and to left into Quad 3 or 4, and the most bullish move is a shift up and to the right from Quad 4 into Quad 1 or 2. Bearish moves have a higher probability of margin risk in the coming quarters and bullish moves have higher probability of margin upside. This is a screening analysis, so a bullish or bearish move doesn’t automatically make for a good long or short, but it provides a list of ideas to vet further as it relates to the Trend investment opportunity long or short.
Industry Trend: In 3Q21, the Retail Industry was in the sweet spot of Quad2, though saw a negative directional shift with margins expanding at a slower rate and sales outgrowing inventories but at a lesser rate. Margin risk is not imminent but given the directional move and the comparisons, the move in the coming quarters is likely to be farther down and to the left, ie building margin risk.
We highlight the notable positive and negative tickers below. But there are several that stood out to us as particularly severe or notable for further vetting. These are bolded and underlined.
Bullish: DG, DOL, DUFN, GES, GIII ABG, ANTA, BJ, KER, OSTK, PLCE, SFIX
Bearish: BBBY, BBY, BGFV, BOO, CRI, CTC, CVNA, CWH, JWN, LESL, LZB, SBH, SHOO, URBN AEO, AMZN, CHWY, CFR, DECK, FL, FND, GPS, HOFT, HVT, KIRK, KMX, LEG, LOVE, NLS, OLLI, PANDY, POOL, PTON, RCKY, REAL, RGR, ROST, RVLV, SHW, SPWH, SWBI, SWK, TCS, TJX, TPX, ULTA, VSTO, YETI
