The Sunny Side of “Marpl” may induce a short squeeze. April is, in a word, good. Week 2 of April should be the best comp week of the quarter. Last year, Easter Sunday was in March week 5 (March 27, 2016) versus April week 3 (April 16, 2017) this year. April week 2 reads should, in most cases, be “Deeper” due to the Easter shift. Retailers typically run their most aggressive/deepest promos during the height of Spring Breaks (generally the two weeks before Easter). The shift of Easter/Spring Break is most relevant for children and teen retailers due to the associated spring break holidays and can represent over 1000 bps of comp shift from March to April. While the April benefit is circumstantial and should be discounted in stock prices, we caution that the historically-high short positions across the sector could cause a near-term trading squeeze. For March, 41% of retailers in the sector have a short position above 15%.
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At the request of investors, we have expanded our proprietary inventory analysis to include a broad swath of companies, including branded apparel manufacturers, department stores, specialty retail, off-pricers, & discounters/mass merchants.
Retail Earnings Quality (“REQ”) Score 5 out of 10; 1Q17 comp miss of -2.4% vs. Cons. +3.4%; adjusted EPS of $0.05 (GAAP $0.01) vs. Cons. $0.07. KATE pre-announced 1Q17 quarterly results with a miss on adjusted EPS of $0.05 vs. Street at $0.07 (note: we are stripping out $9 million of non-recurring charges). Sales missed as well, which was largely a result of brick-and-mortar comp deceleration to -8.1%, offset by double-digit e-Com growth. Our Retail Earnings Quality score (“REQ”) of 5 was largely driven by gross margin improvement as well as improved inventory metrics. Shares of KATE were down ~7% during the trading session.
The Wolfe Retail Monthly Short Report is published using the end-of-month reported short interest positions. Our Retail Monthly Short Report helps to gauge sentiment on individual stocks. In this report, we show two metrics 1) short interest shares as a percent of float and 2) short interest share change month-over-month for the last twelve month period. Given the increasing volatility in the sector, particularly ahead of earnings reports, we believe tracking short interest in concert with recent stock price moves relative to valuation is another useful tool to gauge near-term investor sentiment.
New Metric: Retail Earnings Quality ("REQ") Score. Beginning this quarter, we introduced a new quality-of-earnings metric that we call the Retail Earnings Quality Score. We rank a retailer on a scale from 0 to 10, with 10 points representing "perfect" earnings quality. Our REQ Score assesses the health and quality of a retailer's quarterly earnings report by assigning point values on eight criteria. Please see page 5 of this note for additional details on our criteria.
Introducing a New Metric: Retail Earnings Quality (“REQ”) Score. BBBY received an REQ Score of 8 out of 10. Beginning this quarter, we are introducing a new quality-of-earnings metric that we call the Retail Earnings Quality Score. We rank a retailer on a scale from 0 to 10, assessing the health and quality of a retailer’s quarterly earnings report by assigning point values on eight criteria. See page 3 of this note for our criteria.
ZUMZ reported a March comp miss of +1.1% vs. the Retail Metrics Consensus of +2.8%. Despite a below expectations print, we highlight another month of positive transactions amidst a challenged traffic backdrop. We estimate transactions to be up roughly LSD to MSD with average transaction value down ~LSD. Average unit retail (“AUR”) was up YoY indicating a healthy mix from more full-priced selling of apparel goods and less discounting overall for the month of March. Men’s and Junior’s categories exhibited positive comps while hard goods, footwear and accessories were negative. Shares were largely unchanged during the after-hour session.
Wolfe Research Senior Consumer Research Analyst, Adrienne Yih, hosted a fireside chat with the management of Chico's FAS, Inc. for investors.
AMC on (4/3/17), URBN filed their 10-K and reported 1QTD retail segment comp of -MSD. We believe URBN comps are at the higher (worse) end of a -MSD range, or about -6%. Included in the Management's Discussion & Financial Analysis, URBN commented on the consolidated QTD comp trend (including DTC), “Thus far during the first quarter of fiscal 2018, comparable Retail segment net sales are mid-single-digit negative.” We note 1Q17 headwinds include the Spring Break/Easter shift (we estimate to be ~100 to ~150 bps of comp pressure QTD) and negative mall traffic trends. In reaction, the stock traded off ~3% in after-hours trading.
Week 3 of March is the first week of the three-week shift from the Easter/Spring Break move out of March and into April; as such it is imperative to view March/April together (known as the “Marpl” effect). Last year, Easter Sunday was on March 27 versus April 16 this year (three weeks later). Therefore, the Easter holiday (and accompanying Spring Break holidays) shifts to April’s week 3 from March’s week 5, delaying spending further into the quarter. The shift of Easter/Spring Break is most relevant for children and teen retailers due to the associated spring break holidays.
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