As much as I’d like to say that the retail earnings season carnage presents us with a buying opportunity, I can’t. The reality is that we just saw a draw down from peak multiples to something closer to what I’ll call ‘average’ (whatever that means). We saw this, in large part, without any meaningful degree of re-base in earnings expectations over the next four quarters. That’s a problem. We’ve got slowing GDP, crimped consumption, no more tax tailwinds, merchandise margin risk due to higher inventory levels, a disproportionate amount of risk to gross margins due to a reversal in mix back towards e-comm (B&M strength helped 2018), then tack on wage increases, higher freight costs and you’re left with a 500bp-1,0000bps EPS growth drag into 2019. That’s not even mentioning the tariff impact, which is another potential GM drag, or the change in lease accounting rules, which hurts reported ROIC and leverage – and will be a multiple compression event in 2019.
So the punchline here is that we’ve just seen the first multiple event. It might seem like it’s over – and you missed it short-side. But next we’re likely to see downward earnings revisions – and without a subsequent drawdown in the stocks will put the group back towards peak multiples. That’s a problem. More likely than not the stocks are down with earnings…and then there’s the risk of testing trough multiples while the Street explores the REAL floor in earnings expectations.
That’s what we’ll be presenting in our Black Book on Tuesday December 18th. Yes, there are places to hide long side. But make no mistake – this group is still very shortable. Even if you couldn’t click the sell button fast enough this EPS season, and kicked yourself thinking you missed each name that sold off – the truth is that there’s still plenty of Alpha to be captured short side.
Our updated Position Monitor is below. But note that we’ll have several changes (additions/deletions) when we present our deck next week.
Date/Time: Tuesday, December 18th at 10AM EST
Confirmation Number: 13685253
Live Video Link: Will be provided prior to call.