We updated our SIGMA book of 175 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 lower 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 1Q22, the Retail Industry took a sharp move to ‘Retail Quad 4’, which happened to coincinde with Macro Quad 4 – yes, there is a difference. In effect, inventories are building aggressively vs last year, and margin pressure is stepping up. After announcements from the TGT’s and WMT’s of the world, you have to be living under a rock to not know that there’s an inventory problem. But the key here is that in looking at the industry chart, the inventory build does not look anywhere near where we expect it to land after we exit 2Q Retail Earnings season. Yes, the stocks look cheap, but we think numbers are still too high, and the negative revision cycle is far from over. Cheap can always get cheaper. That’s not to say that there’s aren’t any standouts bull-side, but the bearish callouts outnumber the bulls by a massive margin – 28 positive SIGMAs (potential margin upside), and 80 negative SIGMAs (gross 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. Thematically, the companies in the best shape are linked to the Auto Supply Chain – especially the dealers (AZO was only negative callout). Apparel and General Merchandise have the worst setup across the board. We think when we run this analysis after earnings season, the apparel retailers in particular will be in the worst shape, and the stock prices accordingly.
Bullish: ABG, ADDYY, AN, BBWI, BNED, BOSS.GR, CPRI, CRMT, CTC.A.CN, DDS, DOL.CN, DUFRY, GES, GPI, HELE, ITX-SA, LAD, M, MUSA, MYTE, ODP, OSTK, PAG, PVH, REAL, SAH, ULTA, VNCE
Bearish: AEO, AMZN, ANF, ASO, AZO, BBBY, BBY, BGFV, BIG, BOO.LN, CAL, CONN, CRI, CTRN, CVNA, CHW, DECK, DG, DKS, DLTR, FIVE, FL, FLWS, FND, FTCH, GCO, GIII, GOLF, GPS, HBI, HD, HIBB, HOFT, HZO, JOAN, KIRK, KMX, KTB, LEG, LL, LOVE, LOW, LULU, MNRO, NLS, OLLI, PLCE, PANDY, PRPL, PRTS, PSMT, PTON, RAD, RCKY, RGR, ROST, RVLV, SCVL, SHW, SNBR, SONO, SPWH, SWBI, SWGAY (Swatch), SWK, TCS, TGT, TSCO, TTSH, TUP, UAA, VSCO, W, WBA, WMT, WOOF, WSM, WWW, YETI, ZUMZ
