Holiday sales are flowing in on key retailers, several of which sit on our best ideas short list (KSS, TGT, M).
Ultimately we are not surprised to see these stocks getting hit, especially after the post Christmas bounce.
Our view heading into holiday results was that sales should generally look good. After all the consumer is at peak, companies are fully stocked with inventory, and data points were indicating that sales were solid heading into Christmas.
However we expect margins to underperform relative to the sales performance with inventories building, more incremental $ coming from ecom vs B&M (see slide below), online free shipping battles, and high wage growth.
Retailers have struggled to put up material(or any) EBIT growth while the consumer has accelerated to the best level seen in a decade. As we look at 2019 we think US GDP and the US consumer slow, while gross margin pressure increases, and wages still march higher.
Street EPS numbers for KSS and TGT imply mid single digit growth as tax rate is no longer a help. We think the real result is more likely to be 10-20% declines in EPS.
The stocks may look “cheap”, but the multiples we see today are not correct, especially when earnings have yet to be revised down. Retail is broken and we think these stocks are still headed lower with both incremental earnings and multiple risk.
For full details see our Black Book, Here's Why Retail Is Broken: CLICK HERE
Quick Company Thoughts:
TGT
- TGT put up a 5.7%, a little better than street expectation of 5% for 4Q. Management is holding guidance at $5.30-$5.50 which at the midpoint means EBIT down YY.
- TGT is spending for that comp... SG&A, free shipping, high inventories, store remodels, wage investment. So the solid sales result is not a surprise.
- Also the company reported the CFO has announced retirement. It seems odd given she is only 54 and joined the company only about 3.5 years ago.
- We also would have expected a tightening/raising of the guidance range with the higher comp result and the elapsed time. Not sure if the planned CFO departure means less near term visibility on numbers, hence just a reiteration.
KSS
- KSS reported a shifted comp of 1.2%... no detail given on the unshifted or comp, probably because it’s in the area of 250bps lower throughout the quarter. So with the street at a flat reported comp in 4Q, it looks like a comp miss here about in-line with our model.
- Management is guiding EPS toward the top end of the prior range. That still means 4Q EBIT is likely down slightly, and slowing each quarter from the 21% growth seen in 1Q18.
- The margin profile and mix of GM vs SG&A will be very important for KSS, as well as inventory levels. It’s been able to keep relatively good margins in the face of ecom pressure because of higher AURs via lower markdowns. As the “standard to small” initiative (reduces inventory) runs out of runway, gross margins could be at risk at the same time comps slow.
M
- M reported a comp of 0.7%, 1.1% on a shifted basis. Management lowered EPS guidance it provided in mid-November by $.15-.30 to $3.95-4.00.
- Amazingly, included in the EPS guidance is an additional $35mm in asset gains (~$.09 per share) and an extra $10mm in credit revenue (~$.02 per share).
- Management said the holiday season began strong, but slowed in mid-December (sounds like the cold weather trend). That led to the comp and margin miss. Also part of the guidance was management noting it wanted clean inventory levels (again industry inventory levels are becoming an issue) implying higher discounting in January. Gross margin guidance was lowered from up slightly to down slightly.
- Also, it’s not a great start in guidance for the new CFO after the legend Karen Hoguet has left. Full year EPS was raised on 3Q print remember... #FAIL.
