Conclusion: In prior quarters, negative SIGMA callouts (gross margin risk) have outnumbered positive callouts be nearly 3-to-1. This quarter, they’re much more balanced. The group call matters less, and the individual stock picking matters more. The group is still bearish, and consensus expectations are still too high. But inventories are correcting, at least relative to past levels of consumer spending. Our sense is that the consumer takes another leg down, leading to another inventory bloat. Our current thinking is that this coming earnings season (CY reporting season started already – Retail in Aug) and we think it will be the worst in a decade. Be careful what you own. Our top long ideas are RH, NKE, CPRI (after the guide down), REAL, DRVN, DECK and VVV. Top Short Ideas include HELE, JWN, LOW, LOVE, GOOS, WSM, and HD.
See Full SIGMA Book of 185 Tickers 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. This is a critical tool for us in monitoring the TREND directional rate of change in the P&L vs the Balance Sheet. Given the comparisons this most recent quarter, the vast majority of companies saw a bullish move towards correcting inventories, but in most instances inventory relative to sales and margins are at dangerous levels on a stand alone basis. 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
Definitely some puts and takes in the Global Retail Industry SIGMA chart. On one hand we’re clearly seeing inventories continue to correct, which has been the case for the last few quarters. That’s the obvious trend that jumps out from the chart below, and initially comes across as bullish. On the flip side, we’re now five quarters into the year/year change in margins in negative territory. If it were only four quarters, we might consider that we’re at the point of an ‘easy margin comp’ inflection. But the industry has already shown us that it’s overearning on a multi-year basis, and we could potentially see another three quarters of down margins. That’s more bearish that the inventory trend is bullish. The real punchline is that the ‘group call’ is getting less important, and we have to look closely at companies on an individual basis, in this SIGMA analysis and in our models.
BULLISH CALLOUTS (62 in Total)
Prada (1913-HK), AEO, AMZN, ANF, Anta, ATZ (borderline), AZO, BARK, BBWI, BNED, BOO.LN, BOOT, BRBY.LN, BURL (though we’d short it), CAL, Richemont (CFR.SWX), CPRI (though likely to guide down), CPRT, CRI, CRMT, CVNA (miraculously), CWH, DECK, DLTH, DLTR, ELF, FND, FOSL, FCROY, FTCH, GPS, HELE (though we’d short it here), HOFT, Inditex, JOAN, KIRK, KSS (though mind credit risk), LE, LULU, MELI, NKE, OLLI, PLCE, POOL, PRTS, PSMT, PTON, REAL, RH, SFIX, SHOO, SKX, TCS, TGT, TJX, TPR, TPX, TSCO, URBN, VERA, VVV, WMT, WWW.
BEARISH CALLOUTS (88 in Total)
AAP (widely telegraphed), ABG, ADDYY, AN, ASO, BBBY, BBY, BGFV, BIG, BIRD, BKE, BOSS.GR, CHWY, COLM, CONN, COTY, CTC.A, CTRN, DBI, DDS, DG, DKS, DOL.CA, DUFRY, EL, MODG, EXPR, FL, GCO, GES, GIII, GIL (though looks ready to turn positive), GOLF, GOOS, GPI, HBI, HD, HIBB, H&M, HVT, HZO (looks horrible), IPAR, JWN, KER.PAR, KMX, KTB, LAD, LEVI, LOVE, LOW, LZB, LVMH, MNRO, MONC.MIL, MOV, MUSA, MYTE, ORLY, OXM, PAG, PANDY, PLBY, PRPL, PVH, RAD, RCKY, RGR, RVLV, SAH, SBH, SCVL, SIG, SNBR, SONO, SPWH, SWBI, TLYS, TTSH, UAA, ULTA, VFC, VNCE, VSCO, VSTO, W, WSM, YETI, ZUMZ.
