1. TPR is the top name I care about this week. I’ve been a broken record on that one. Looking for a 5% EPS beat, healthy trends out of the core Coach brand, stability/upside in KATE, and signs that the SW debacle is behind the company. They are not bringing the entire sell side to ‘meet and greet’ management on earnings day to drop bad news. But rather to instill confidence that this multi-year 20%+CAGR story (Street is at 12-14%) is on track. My top Long alongside Gildan. I bet no one even mentions the word ‘license’ in Q&A even though it is one of the pillars of why the Street will be upgrading this name at $70.
2. HOME DEPOT – Put up or shut up
Two things on HD. Let’s not forget that it is sitting in the worst SIGMA position since the Recession – its comp/GM/inventory position needs to put up or shut up. One of the few times I’m more comfortable owning LOW.
Also, I gotta call out this point from Redfin. HD noted on the 1Q call that two markets that have seen extraordinary home price appreciation - Denver and Seattle - where business has been very strong. Yet RDFN flagged that just recently, there are clear negative data points on housing trends in these key markets…
“We expect U.S. home sales growth to have improved slightly in July then to weaken again in August and September. What's striking about this change is that it seems to have been driven by diffident demands from homebuyers, not just the low supply of homes for sale. Nationwide, there were still 5% fewer homes for sale in July 2018 than in July 2017. But in Seattle, Portland and San Jose, where prices have increased the most, the percentage of home selling in the first 2 weeks in the market declined in June from 61% to 52%. And the percentage of listings that dropped their price has increased from 31% to 33%. June sales were down in these markets by double digits. And inventory was up, also by double digits. The trend is continuing in July and reports are now coming in from Washington, D.C., Boston, Virginia and parts of Chicago as well that the homes there are getting harder to sell.” - RDFN Conf Call
3. This should be a winner for AAP: Biolsi looking for big beat out of AAP this week. We’re clocking in at $2.00 vs Street at $1.86 and $1.58LY. Consensus SSS est. 0% and HE 0.5% and 0% LY. Toughest comparison as Q2 LY was the only Q not to be negative. Remember final 5 weeks of Q1 was blamed on cold weather. Should see that pickup in Q2. Management has been using weather excuse a lot and not afraid to say it has improved with weather. When ORLY reports 4.6% and NAPA reports a 2.1% SSS increase AAP needs to show a comp increase even against its toughest comparison. Even an interim CFO should be able to report EPS upside in Q2 with the easy margin compares. Either Greco will narrow the margin gap or another management team will. Greco is on the hot seat and he has the easy comparisons and improving conditions to deliver this Q2.
4. WMT – Wing and a prayer in 2H (which speaks even worse for TGT). I hopped off WMT Long Side after the Flipkart deal. Poor capital deployment move (usually fails overseas) for a company that has otherwise been a solid steward of capital. Since the last print WMT has been on the tape relatively often as it's evaluating its global businesses and shifting investments. Headlines included:
- Selling Brazil business to Advent
- Considering streaming video service
- Changing credit card partner Aug 1, 2019 to Capital One (bullish, as SYF was getting too tight)
- Selling Wal-Mart Canada Bank
- Considered selling Japan business, but then changed its mind.
We already saw a comp miss early in the year, which is not a good sign given the tougher compares coming in 2Q and 2H. Street expecting a steady 2Q comp rate, with a 30bps tougher compare in 2Q. 1Q Traffic was weak slowing 80bps to 0.8%, while gross margin was down 15bps and SG&A deleveraged 10bps. The bright side was the 1000bps accelerating in e-commerce to 33%, but the company has already put a 40% ecom growth rate for the year into expectations, and it will need that ~120+ comp contribution to be able hit full year expectations. EPS was up 14% last Q, beating by 2 cents, but nearly all of the upside YY was from lower tax rate, while share count was down 2.6%.
With a Hedgeye macro outlook including peaking US, slowing Europe, and slowing China, WMT top line does not look likely to surprise to the upside in FY19, even with consumer spending tailwinds from tax reform. Only thing that could save it this quarter is a favorable GM setup when most other retailers are on the flip side.
5. DDS – an even blacker box than usual. Likely out on Thurs A.M. Company did not quantify calendar shift impact in 1Q. It saw a 100bps slowdown with a likely calendar benefit and promotional help with lower GM%. Doesn’t bode well for rest of the year where comps are harder and the shift becomes a drag in 2H. After 2 quarters of SIGMA improvement and 1 quarter in the sweet spot (4Q), the set-up is now very negative, with inventories outgrowing sales on down margins. Even with the pullback from the June peak, the stock is still up 50% YY. One of the poster children for the 2H ‘Apocalypse Now’ fade.
6. JCP – race to the bottom. DDS might be a black box this quarter, but JCP will be a cavernous Black Hole. No CEO and it’s unlikely to attract any talent to drive this ship anywhere but down. Couldn’t pay me enough coin to take that job. The question this quarter is simply what is the extent to which JCP is accelerating the race to the bottom, and what merchandising changes (i.e. more athletic) will it take to stem the demise. We all know how these ‘dead-tail-ers’ hang on for years longer than people think. But most dead-tail isn’t saddled with JCP’s debt burden (and Goldman securitized the only sellable real estate). This company is terminal and Sephora can’t save it when it struggled to comp positive in 1Q despite a 250bp calendar tailwind.
7. Macy’s – Let the spin begin. Hoguet out. Price in. Karen was the Master of spin. I did not like her as CFO – but she was effective in gaming the sell side. Lets see how her replacement does. Macy’s clearly got something right in 1Q putting up a 3.9% comp, the best of the department stores. The company tempered 2Q expectations citing the shifting Easter and friends and family event, so the comp bar is low at -0.7%. Add on very clean inventories, setting up for a bullish margin outcome, 2Q print looks likely to be a beat. 2H is where things get whacky. The company is guiding to higher 2H comps than 1H comps, yet the compares are harder, and the calendar shift should become a drag. Not to mention that the company is planning for a LSD% comp – meaning that the freight is on a truck right now heading to the store. Let’s see how those margins hold up. Macy’s believes its strategic initiatives that are coming in the fall will help drive sales, but no retailer has the visibility in sales to justify such a bullish outlook. Let’s see the newbie CFO talk her way out of that one.
8. SPWH – micro cap long? Set-up over the next quarter or two looks bullish for this small cap ($210mm). Easy compares, comp growth on top of square footage growth, market share opportunity from DKS gun policy change, clean inventory position, and improving balance sheet for a levered name. Great SIGMA move and set-up for go forward. Last Q firearm units were up 14.9% crediting the strength to market share gains from competitor (DKS) policy changes. Ammunition increased 9.3% in Q1, also an improvement from Q4's 4.7% decline. If you can go far enough down the cap curve, this might be a good one for you.
9. Not expecting fireworks out of JWN given it just hosted its analyst meeting on July 10th. Let’s see if it can make up lost ground and give the Street confidence it actually knows how to do math this quarter. Remember that the highlight of the analyst day is that it made a bold (and erroneous) statement that its margin is the same online as it is in stores. I don’t think management knows basic math. Its analysis is flawed for many reasons. 1) excludes the fixed costs associated with operating an ecomm infrastructure. 2) store return rates are 5-8% vs 20-25% online – and JWN pays shipping both ways. That’s the big one. When adjusting for the latter, I could argue that e-comm is 2,000bps dilutive in a heartbeat. And for what it’s worth, as the online sales mix has increased 7% points over the last four years EBIT margins have contracted 400bps despite SSS growing in three of the four years. So if e-commerce margins were the same it does not explain the significant margin contraction over that period.
The Street is estimating a 0.8% SSS increase against a 1.7% comparison. Full line est. -2.2% and off-price +0.7%. Rack should see an improvement at some point this year, but the analyst day didn’t make it sound like it would be Q2. Yes, it should have some EPS upside. But will full line SSS have a positive comp? Unlikely. The real question – does any of this digital growth have any margin? We’ll never see double digit EBIT margins again.
This shouldn’t be a public company – but that ship has sailed.
