Editor's Note: Below is an excerpt from veteran Retail analyst Brian McGough's daily morning industry note "Retail Direct." Institutional investors email sales@hedgeye.com for more info on access to his team's research.
A Quick plug…
We hosted our Auto Parts Retail "Black Book" yesterday.
I think we raised as many questions as we did answers. But the way I see it, that’s a key part of what we do. Much more to come there… and more tickers than just AutoZone (AZO) (short), O'Reilly Automotive (ORLY) and APP (Long both).
What I care about most this morning is…
… Primark (ABF) which’ll most likely slip past most of the US today.
If you don’t know ‘em, Primark is likely the biggest disruptor to apparel retail since H&M (which is in trouble). Not since UnderArmour ‘compression apparel’ have I seen a business in retail with such high asset turns (8x) in conjunction with high margins (10%). There’s your 65% tax-adjusted RNOA. (UA was 10x turns at 30% margins…yeh that’s why it went public – oh how things change). Usually business models trade off one for the other. This one’s got both = $$$.
- The company only has 8 stores in the US, but 360 globally.
- Basically, these are fast(est) fashion boxes where you can buy a whole outfit for $15 – including shoes. Wear ‘em twice and then wash your car with them.
- That said, sales missed. +7% vs Street at 9.7%.
- Weak October, but strong holiday. UK strong, which is its powerbase.
- Still failing in the US “work in progress”.
My sense is that Primark takes advantage of comatose US real estate as rents plummet. Concepts don’t make money in a region unless you can get over 50 stores. Primark will either step on the gas, or the brake. The over/under is on the gas. Current plan is for 30 new stores this year. That should accelerate – perhaps as much as by a factor of 2 (presuming it adds the talent to execute) in ’19. That’s mall-bullish and dept store (KSS/JCP/M/DDS) bearish.
Meanwhile...
GNC actually put up a positive pronouncement this morning. Sign of the apocalypse? Maybe, but it comped 5.7% against a -12%. Keep in mind that last year gross margin % contracted 710bps w EBIT mgn off 1030 in 4Q. It’s a bad short today, and maybe a bad one for the next 1-2 quarters given the setup -- but does not mean it is not in the Pier 1 category of not existing in 3-years.
Unless it launches a crypto...
Speaking of Cryptocurrencies…
If you don’t know LITB (Light in the Box) you really don’t need to – unless you’re chasing crypto currencies. Company has announced it opened a blockchain technology research lab to explore and develop blockchain platforms for cross border e-commerce. Stock up 25% pre-market. OSTK, the new major “cryptoretailer” is up 350% yy. This is ridonkulous, imho.
My Partner Michael Blum (and Hedgeye President – and Hedgeye’s International Man of Mystery) asked me recently about the over/under of Amazon launching a Crypto-Currency. I’d peg the change of accepting bitcoin at less than 5%. That said, Bezos definitely thinks that he is more powerful than the Fed – and certainly more powerful and more relevant (and arguably more safe) than Bitcoin. In reality, he is. I’d peg a global Amazon chit at 80% or better over 18-24 months.
*Institutional investors email sales@hedgeye.com for more info on Retail analyst Brian McGough's research.