PIR - Seems Binary; Worth A Deeper Look
The earnings algorithm was nothing short of messy with a 2% comp and 3% sales growth deleveraging to -50% EPS growth. But with short interest at 3yr highs and expectations cut in half from where they were 6 months ago, an inline earnings number is enough for a rally on the print. We can poke holes in this story all day, but we need to candidly ask ourselves what management knows about the cost cutting and margin opportunity that the Street does not. While short interest more than doubled since the end of March to 15%, PIR continued to lever up to buy stock, with share count down 7% yy, and net debt to capital at 21% (vs -2% last year). This seems like a binary story to us -- -and we're not yet certain about which way it'll go. But this seems to us like a ratan balloon being held underwater -- it's only a matter of time before either the bulls or bears win in a meaningful way. We're adding this to our queue of names to vet more thoroughly, and will be back with a more concrete view by duration.
Other Factors That Caught our Attention
E-comm was up almost 100% in the quarter. With DTC penetration at 17%, up from 9% last year (and 4% two years ago), the quick adoption rate by the PIR customer looks promising at face value. But, PIR’s customer base is right in the Wayfair wheelhouse (amongst a litany of other competitors) and you have to believe that PIR’s merchandise assortment is enough to keep the customer coming back for more. Management would point to the fact that in-store online order rates were up 600bps YY to 31% as a way to prove that the brand is properly engaging with the customer across channels. We still have our doubts.
The sales to inventory spread improved marginally from where’s it been over the past 2 quarters, but the company still has a lot of wood to chop to hit its goal of a positive spread by years end. With promotional activity up YY in 1Q, we would have expected a slightly better improvement. Now the company will be forced to step up its promotional game through the balance of the year. Consensus gross margin expectations for the rest of the year call for 30bps of deleverage which seems optimistic with inventory at its current levels and e-commerce adoption rates and in-home fulfillment accelerating.
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