Keep an eye on inventories coming out of Q1. We’re seeing a directional bifurcation between components of the mid tier (TGT/KSS bad, GPS, BONT good). That alone is notable. But tack on the fact that the off-price channel is ripping (TJX, ROST), and this is not a bullish event.
April sales were light as reflected by the beat-to-miss ratio coming in at only 9 companies coming in better than expectations with 11 misses. As expected, companies pointed to the holiday shift, weather, and even a later Mother’s Day to explain away sales underperformance, which would be more acceptable if March sales had come in that much better, but they didn’t. We expected some surprises after March sales demand didn’t come in stronger, but admittedly the surprise was in fact the resilience in Q1 earnings expectations with the final month now in the books. This was the key callout of the morning with five companies taking expectations higher, or towards the higher end of prior ranges, implying stronger margins due to favorable inventory positioning despite some posting weaker top-line results.
Heading into Q2, we think inventory management will prove more critical than any quarter in perhaps the last 4-years due to competitive pricing environment disruptions. This in turn will drive a clear bifurcation between the companies that have inventories in check versus those that don’t.
Here are some additional callouts from this morning:
Off-Price/Discounter Outperformance: ROST and TJX continue to outperform the rest of retail coming in +7% vs. +3.5%E and +6% vs. +3.3%E respectively representing the biggest beats to the upside. These results mirror outperformance throughout Q1, which reflects a strong sequential acceleration in sales growth both on a 1yr and 2yr basis for both retailers. Both increased their respective earnings outlooks reflecting early bullishness.
ROST posted sales up +14% on a -3% decline in inventories in Q1 resulting in an 8pt sequential improvement in the sales/inventory spread to +16%. Moreover, the increase in Q1 EPS outlook ($0.92-$0.93 vs. $0.89-$0.91E) suggests the company avoided gross margin contraction as was expected in what is the toughest margin compare of the year. Very positive.
TJX traffic continues to be a key driver of comp with stronger earnings suggesting similar margin implications as highlighted at ROST given TJX’s recent sales/inventory position as seen in the chart below. While TJX does not disclose where inventories at quarter end, we suspect this metric improved given stronger sales growth and ROST’s results. Improvement in the European business appears on track as well.
It’s worth noting that the comp spread between the off-price and total comps expanded for the fourth consecutive month (see chart below).
Mid-Tier Weakness: Mid-tier sales came in light with TGT, KSS, GPS, M, and BONT all missing comp expectations – SSI was the only one to come in ahead of expectations posting a less bad -1% decline vs. -4%E.
As noted, while this does not come as a surprise given the disjointed nature of the current department stores environment, inventory positioning was critical in Q1 and will be again in Q2. GPS and KSS were good in this regard leading to GPS guiding EPS higher while enabling KSS to maintain expectations despite missing top-line expectations.
BONT sales were dismal coming in 2pts below expectations for the quarter reflecting a sequential deceleration in sales against substantially easier comparisons suggesting a turn in the business is still not likely near-term.
At GPS, with earnings higher on lighter sales, relative margin strength supports the prospect for $2+ in earnings this year that’s needed to drive the stock higher from current levels. More importantly, with inventories in check, earnings will
be less reliant on sales performance over the near-term.
High/Low-End Bifurcation: The High/Low comp spread expanded in April and Mar/Apr levels remained consistent with Feb +6pts wide. JWN (+7.1% vs. +6.3%E) and Neimans +4.3% posted good numbers, while M (+1.2% vs. +2.0%E) and SKS (+2% vs. +5.6%E) came in light at the high-end, yet positive. On the low end, KSS (-3.5% vs. -1.2%E) and BONT (-5% vs. +0.3%E) missed handidly with SSI (-1% vs. -4.3%E) coming in less bad.
Inventories: GPS, TGT, and ROST were the retailers to callout favorable inventory positioning in April. Not surprisingly, two of the three increased guidance.
COST: Uncharacteristically missed expectations for the second consecutive month (+4% vs. +5.5%E). Gas had no impact on comps while Fx impacted total comps by -100bps. Categories performed equally well with all up +MSD with the exception of Majors down slightly due to weakness in electronics.
Outlook Updates:
ROST: ($0.92-$0.93 vs. $0.89-$0.91E)
TJX: (Q1: $0.54 vs. $0.51-$0.52E & FY: a penny higher on both ends of the range to $2.26-$2.36)
KSS: Maintaining $0.60 in EPS despite lighter sales
GPS: $0.44-$0.46 vs. $0.40E
LTD: $0.38-$0.40 vs. $0.35-$0.40 prior
HOTT: $0.07-$0.08 vs. $0.02-$0.05 prior; Q2 ($0.06)-($0.04) vs. ($0.03E)
ARO: $0.12-$0.13 vs. $0.08-$0.10 prior
AEO: Full-year $1.06-$1.12 vs. $1.08E
Casey Flavin
Director