Let’s synch expectations for earnings revisions, earnings growth, with valuation and stock performance. Not a pretty story. We still think margins are off in apparel retail by 300bp next year.
In the land of retail, there’s usually 2 main factors that that drive stock performance (outside of M&A). 1) Earnings Expectations, and 2) the Delta between Expectations and Economic Reality.
Today, we are looking at 16x forward earnings expectations, and a 16x multiple that the market is placing on those expectations becoming reality.
What’s interesting is that in looking at revisions, multiples, earnings growth, and absolute stock price change…the past three years has been so typical of retail. Peak multiples on peak earnings, and trough multiples on trough earnings (with the sell-side earnings revisions lagging stocks by about 3-5 months).
Today’s bull could argue that we’ve taken this ‘peak on peak’ exercise up and above 20x/20% in years past. Math is math and I won’t dispute it. But what we would argue is that if we look at history going back a decade, there’s never been period where it’s been sustainable for anything more than six months. Also, the cost pressures at retail to drive margins lower were nonexistent during such times. In fact, we think that retail will be down around 300bp next year. There is absolutely no way that the charts below recognize this as anything in the ballpark of being a possibility.
