Conclusion: The spread between negative and positive SIGMA callouts (gross margin risk) has continued to decrease from over the last few quarters. 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. While things look bullish from an inventory standpoint, margins are still at risk, particularly as pricing taken over the past 3-years begins to give back. Off-price is a positive standout, with both inventories down and margins up. Most other retailers have a positive (bullish) sales/inventory spread, though are more likely than not to disappoint on margins due to early holiday promotions. Be careful what you own. Our top long ideas are RH, NKE, SKX and FL. Top Short Ideas include HELE, JWN, LOW, LOVE, GOOS, WSM, and HD.
See Full SIGMA Book of 174 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 -- at least directionally. That’s the obvious trend that jumps out from the chart below, and initially comes across as bullish. On the flip side, we’re six 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 two (or more) quarters of down margins. Quad 1 (clearance mode) is usually transitory in nature -- lasting for only 1 or 2 quarters. But we can envision a scenario throughout much of 2024 where margins are still down despite inventories being clean due to the sheer magnitude of how much retail is overearning. Keep in mind that the consensus has earnings for Retail in aggregate up ~35% next year. Our analysis suggests it will be negative. As much as we want to be bullish right now, we just can't be with any shred of intellectual integrity. Numbers need to come down. Yes, the XRT is trading at trough multiples, but the 'E' in the PE equation is wrong.
BULLISH CALLOUTS (41 in Total)
1913-HK, AEO, AMZN, ANF, ANPDY, AZO, BBWI, BIRD, BNED, BURL, CAL, CHWY, CPRT, CRI, CRMT, CVNA, DBI, DECK, DLTR, DOL.CA, DXLG, FIVE, FRCOY, GES, GIII, HMB-SS, KIRK, NKE, OLLI, PLCE, ROST, SFIX, SKX, SWBI, TGT, TJX, TPR, TPX, URBN, VNCE, VRA
BEARISH CALLOUTS (57 in Total)
Industry, AAP, ABG, ADDYY, ABG, BGFV, BOSS.GR, COTY, CPRI, CTC.A.CA, CWH, ETD, EXPR, FTCH, GOLF, GOOS, HIBB, HVT, HZO, IPAR, KER.PAR, KTB, LAD, LESL, LEVI, LL, LOW, LZB, MNRO, MONC, MOV, MUSA, MYTE, ORLY, OSTK, OXM, PAG, PLBY, PRTS, RGR, RH, RVLV, SAH, SBH, SCVL, SIG, SNBR, SPWH, TLYS, TTSH, UAA, ULTA, VFC, VSCO, VSTO, WOOF, WWW, ZUMZ
