Quadrants Don’t Lie

With earnings season largely past, let’s do a post-mortem to see where each apparel/footwear name is in its earnings cycle. The bottom line is that we continue to see net positive change. You all know our quadrant analysis – if not you should. It is a great way to gauge a management team’s behavioral make-up when presented with challenges to their respective operating models. Do they tend to over-order inventory? Are they proactive vs. reactive in clearing it out? We keep this warehoused in detail for almost 100 retail-related companies. Some key call outs (in the following graph) are as follows…

Quadrant 1: This is where sales are growing faster than inventory, and margins are positive. The percent of companies falling into this basket went from 23% to 6%. Counter to what might initially seem to be the case, this is quite bullish. Statistically, the best shorts are sourced in this quadrant. ROST is the one that stands out to me here as being the most vulnerable.

Quadrant 3: This quadrant is the inverse of Q1. Inventory is building AND margins are off. Some of the worst companies can spend years in this quadrant. But it is also the source of some of the best longs, as the next move (within 2 quarters) is historically a move into Q4 (margins off, but the balance sheet gets clean). Names that stand out to me include Bed, Bath and Beyond, Hibbett, J Crew, Under Armour, Ralph Lauren and Liz Claiborne. This quarter, we saw 63% reside here vs. 46% last quarter.

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