Promotional drumbeat continues in 2Q17. Most apparel retailers missed plan for the combined March/April time period. May, which begins the second quarter, has been met with volatile weather and ongoing consumer malaise. As such, promotions continue and set an early tone for a highly promotional summer selling season.
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We spoke with a private TL carrier about recent demand and pricing trends. This carrier noted that demand has been better than seasonally normal so far this quarter, with a 20% increase y/y in tenders. As a result, our contact has been able to increase utilization about 2% y/y so far in 2Q despite also growing his fleet 6% YTD. That said, pricing remains under pressure and is still down over 1% y/y. Our contact added that he's not seeing driver pressures and expects to grow his fleet another 4% the rest of the year. Looking ahead, this carrier believes TL capacities will tighten by 4Q due to a combination of normal seasonality, ramping oil activity, and the initial impact of ELDs. This should lead to strong rate increases over 5%-10% next year with shippers that have been most aggressively trying to get lower rates over the past two years; and more modest 2%-5% increases with customers with long relationships that have been more reasonable over the past year.
Huntsman (HUN) announced that its IPO of Venator, the Pigments and Additives business is likely to happen in either July or August of this year. The IPO is the preferred route which will allow deleveraging at the parent, however the spin-off option remains on the table if IPO market conditions become unfavorable. Venator Materials Corporation business will be supported by the strong pricing recovery of titanium oxide and certain business improvement opportunities which will generate approximately $75M in EBITDA. Furthermore, Huntsman and Clariant (CLN VX) announced a merger of equals in a deal which would make the combined entity a global specialty chemical company with sales of approximately $13.2B.
This week we hosted most airlines we cover (and some we don’t), at our 10th annual Global Transportation Conference. Thanks for coming, if you did.
It is hard to argue that Costco isn’t an incredible franchise with an advantaged business model and a thoughtful management team. At the same time however, the equity, in our opinion, seems priced for perfection as the solid growth and management’s penchant for returning capital to shareholders appears more than priced into the equity. While Costco put up a strong third quarter and it looks like 4Q17 will follow suit, the new co-branded credit card is adding in the ball-park of $0.50 to earnings this fiscal year and valuation is above historical averages, keeping us Peer Perform rated on the equity.
1Q17 big EPS beat; Retail Earnings Quality (“REQ”) Score of 5 out of 10. Comp, sales, and SG&A deliver upside to Consensus, but gross margin misses expectations due to supply chain investment and E-Com growth, which grew a whopping 70.9% YoY to ~8% of total sales. ULTA reported GAAP EPS of $2.05, inclusive of a $0.14 tax benefit from the change in stock-based accounting rules. Adjusted, ULTA posted a $1.91 vs. Consensus of $1.80, on a comp of +14.3% (vs. Consensus of 11%). Despite the solid EPS, gross margin again missed consensus and contracted by 20bps YoY. 2Q17 EPS guidance is a range of $1.72 to $1.77 (Cons. of $1.76) on comp growth of +10% to +12% vs. +14.4% LY. FY17 GAAP EPS guidance is expected to be up in the mid-twenties (up from low-twenties from previous guidance). ULTA shares traded up ~4% in reaction to the strong quarter, comp momentum, clean inventory, and market share gains.
Best Buy put up another surprisingly strong quarter and it appears the equity may be finally throwing off the shackles of the company’s poor performance seen prior to the current management team. BBY, in our opinion, is turning into an exceptionally run company and is finding additional revenue streams as well as further cost savings to continuously show better profit and ROIC. Moreover, the solid work of the management team is overcoming the secular challenges in the industry and our fears regarding the TV cycle. With that said, shares are up significantly over the last six months and there remains some uncertainty around availability of large screen TVs in the back half. We remain Peer Perform.
1Q17 Loss per Share miss; dividend remains; guidance for weak 2Q17 with trend improvement in 2H. The miss came from lower GM, higher-than-expected SG&A, and tax hit, offset by a promotionally-driven sales/comp beat. 1Q17 LPS was -$0.90 vs. Cons. of -$0.70 (inclusive of a $0.14 charge from the share-based compensation accounting change and additional adverse tax impact of $0.05). ANF comps were -3% vs. Cons. at -3.1%. Abercrombie brand comped -10%; Hollister comped +3%. The positive comp at Hollister was achieved with deeper promos YoY as gross margin contracted 130 bps (lower AUR, partially offset by lower AUC). ANF expects weak comp sales in 2Q17 but improvement for 2H. We remain concerned about market share losses and the inability to successfully turn core Abercrombie. Shares were up 9%.
1Q17 EPS beat; miss on comp and sales due to weak Feb, offset by better GM, SGA, tax rate, and buyback. The comp miss was due to delayed tax refunds, but “Marpl” comps rebounded with a +4.5%. 1Q17 comp was driven by higher units per transaction, offset by slightly negative traffic, declining conversion and lower average unit retails due to mix. Management called out weakness in ladies apparel during the quarter, as weather was uncooperative in February and March, before recovering in April and May MTD. Margin expansion during the quarter was boosted by higher initial markup on product with fewer markdowns. Our longer-term thesis remains intact with the off-price secular growth, shift to Ladies Apparel and Home improving turns, and inventory control driving margin expansion. Shares were up 5% on the day. We reiterate our Outperform rating as we see BURL as a long-term winner.
After several days of group outperformance, the market faded today’s ‘in-line’ OPEC decision, with the SPSIOP down -2.7% vs. a modest gain for the SPX of +0.4%. YTD, the comparative is dramatic with the SPSIOP down -18% vs. SPX up +8%. We believe near-term stock and commodity risks remain, and thus continue to favor defensive exposure to the group with a preference for natgas leverage. While we understand the market paying up (premium multiples) for defensive, low break-even Permian growth, we believe there is more value in select natgas levered stocks. Two stocks we cover stood out. Our revisit of the key drivers of multiples expansion suggest OP rated RICE and GPOR provide peer leading production growth, margins, and leverage while trading below the group average.
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