Two changes to the Retail Position Monitor this week...
Michaels (MIK): Adding to Long Bias list after a solid 2Q. I was surprised by the 15% sell off in Michaels on the print. The company put up a quarter that was much better than decent, and well ahead of consensus on almost every metric. Comps came in at 12% -- which is huge for a company like MIK -- vs the Street’s expectation for a 6% decline. Gross margin and SG&A each beat by about 400bps, with total EBIT margins coming in at 9.2% vs the Street at 1.5% (and last year at 7.3%). Inventory is in great shape – down 19% -- almost too lean. But I’ll take that any day. Liquidity is at $1.3bn, $100mm better than pre-pandemic. E-comm growth in the quarter was up 350%, which is one of the biggest e-comm gains we’ve seen from any retailer reporting 2Q earnings. The knock is that it’s dilutive to the GM% rate, but did not get in the way of the company beating GM/EPS. The only real negative I heard from the call is that management noted that it benefitted from stimulus during the quarter and that it will be difficult to game what 2H sales will be in the absence of another round of stimulus. That said, 3Q sales performance has been strong to date. All in, it’s surprising that such a heavily shorted stock (34% of the float is short) would trade off so fiercely on this kind of earnings report. In fairness, the stock has doubled off the March bottom, so expectations were not at rock bottom -- though it still trades at sub-7x earnings. Ultimately, the question that needs to be answered is whether or not Michaels is a survivor. My sense is that the answer is Yes – though likely at a high-single digit margin. The consensus has steady-state margins going from low double digit pre-pandemic to 8-9% in recovery, which, for the first time in years borders on realistic for MIK. Expectations for 3Q came assume a sharp deceleration in sales vs current trend, which should prove too conservative.
Signet (SIG): Adding back to Short Bias list. SIG out last week with a headline beat on a significant EPS loss of $1.13. Sales down 35% with comps down 31%. The company managed to get SG&A down in line with sales (down 35%) with closed stores and cutting marketing expense. That makes the operating loss look worse given SG&A will be increasing as the stores have re-opened. Rate of change for revenue has been solid and recent trends have turned positive, sales were down 68.5% in May, down 21.8% in June and down 1.3% in July, August is up 10.9%, ecommerce slowed from 72% to 65% but is still driving much of the YY sales growth. With the penetration on e-comm noted, store should be up around LSD in August. The questions is how much of this demand is simply shifted from losses in 2Q, and how much can be sustained? Perhaps there is another month or two of decent sales from pent up demand, but a slowdown is coming and profits should be pressured in a weak consumer environment. SIG has a solid cash balance but created via recent debt issuance with EBITDA trending toward zero for the year. The street expects a rapid recovery to $2.20+ in earnings next year, but the market doesn’t seem to quite believe that. We don’t want to be long a high ticket retailer like SIG with mall exposure and P&L risk to the consumer credit cycle in the midst of a deep recession.
