COMPANY DESCRIPTION:
Gap is a global specialty retailer of clothing and
accessories for women, men, and children. GPS brands
consist of Gap, Old Navy, Banana Republic, Athleta, and
Piperlime. The company operates 3,200 stores
worldwide, and GPS products are sold through nearly 400
franchise locations.
All amounts in US$ unless otherwise noted.
Consumer & Retail — Specialty Retail Q3 EARNINGS SHAPING UP BETTER THAN WE HAD ANTICIPATED Investment recommendation
We are raising our Q3 EPS estimate by $0.08 to $0.73 driven by
better margins than we had expected. GPS guided for Q3
adjusted EPS of $0.72-$0.73, excluding a $0.06 benefit resulting
from the recognition of certain foreign tax credits. Prior
consensus was $0.71. We are raising our Q3 gross margin
estimate by 50bps and reducing our operating expense rate by
90bps. We expect gross margin expansion to return in Q4 and
continue into FY15 and beyond as GPS starts to reap the rewards
from its supply-chain initiatives, at first through fabric
platforming and later from vendor managed inventory and rapid
response inventory management. We continue to believe the
long-term margin expansion opportunity is underappreciated
and not reflected at the stock’s current valuation of 12x our
C2015 EPS estimate and 6x C2015E EV/EBITDA. Investment highlights October SSS split the difference between our estimate and consensus. GPS’s consolidated October SSS declined 3% on top of +4%, versus our -4% forecast and consensus of -2%. October is largely a clearance month, and we are leaving our top-line outlook unchanged for the remainder of FY14.
We are raising our price target by $2 to $51 based on our discounted NOPAT model.
Please refer to our previous update on DICK’s ( posted this week)
The golf industry is in the rough.
Once the go-to activity for corporate bonding, the sport is suffering from an exodus of players, a lack of interest among millennials and the mass closure of courses. The tangled personal life ofTiger Woods, who for years was golf’s biggest ambassador, also hasn’t helped. All that has taken a toll on the companies that make and sell golf equipment, including Dick’s Sporting Goods Inc. (DKS) and Callaway Golf Co. (ELY)
About 400,000 players left the sport last year, according to the National Golf Foundation. While almost 260,000 women took up golf, some 650,000 men quit. A severe winter on the East Coast worsened the situation this year by delaying the start of golfing season for many. Slow sales of clubs and other gear dragged down results for Dick’s this week, sending its stock on the worst tumble since the retail chain went public in 2002.
“Golf is in a bit of a drought,” said Allen Adamson, managing director at brand consulting firm Landor Associates in New York. “It’s a pretty high-price sport, and leisure time is getting crunched.”
Slow golf sales over the past 15 months created a glut of golf inventory at wholesale and retail outlets, forcing them to slash prices. Dick’s is selling some drivers for $99 that were priced at $299 just 20 months ago, Chief Executive Officer Ed Stack said this week on a conference call. Golf sales missed Dick’s target about $34 million in first quarter.
Photographer: Ramin Talaie/Bloomberg
“We don’t feel we’ve found the bottom yet in the golf sales number,” Stack said.
Deep Discounts?
The bleak outlook rippled through the golf industry. Shares of Callaway, a Carlsbad, California-based maker of golf clubs, tumbled 9 percent to $7.60 on May 20. Callaway, which sells the Big Bertha driver, had delivered its own dim forecast last month. The company warned that full-year profit could come in at the low end of its previous guidance, especially if discounting is heavier than expected.
“We anticipate a heavy promotional environment while the industry works through excess inventory,” CEO Chip Brewer said on a conference call in April. The company hasn’t reported an annual profit since 2008.
TaylorMade, the Adidas AG-owned brand that makes clubs and golf accessories, also is suffering. The business saw a 34 percent sales drop in the first quarter, Adidas said earlier this month. Still, not all golf equipment is in decline. Overall, manufacturers’ sales rose 1.2 percent last year, according to the Sports & Fitness Industry Association. While sales of golf balls fell 4.9 percent, clubs grew 4.2 percent.
Younger Generation
Though cold weather and the sluggish economy are providing temporary headwinds, a generational shift may be a bigger cause for concern. The sport is suffering the biggest decline from younger players, according to the National Golf Foundation, with 200,000 players under 35 abandoning the game last year.
“Everybody’s hooked up to their handhelds, so it’s social networking instead of sports,” said Gerald Celente, publisher of the Trends Journal in Kingston, New York. The motivation for wannabe executives to spend hours chasing small balls no longer exists, he said.
“It’s something that’s associated with boom times,” he said. “Most of society’s not moving up, and golf is associated with moving up.”
Woods, 38, helped draw younger players to the game, though his personal challenges may have reduced his influence. He divorced his wife of four years in 2010 after admitting marital infidelity and has suffered a series of injuries.
Fewer Courses
There also are fewer places to play golf these days. Only 14 new courses were built in the U.S. last year, while almost 160 shut down, the National Golf Foundation said. Last year marked the eighth straight year that more courses closed than opened.
The people sticking with the sport are playing fewer rounds than before, often opting for nine holes rather than 18. In total, U.S. golfers played 462 million rounds last year, according to Golf Datatech. That was the fewest number since 1995.
“Golf has been a crummy business for a long time,” said Paul Swinand, an analyst at Morningstar Inc. in Chicago.
Consumer & Retail — Footwear and Apparel STEPPING TO SIDELINES AS GOLF WILL TAKE TIME TO BOTTOM OUT; DOWNGRADING TO HOLD, $49 Target Price
Investment recommendation
On the back of disappointing Q1 results (1.5% comp/50c in EPS vs. our
4%/54c estimate) coupled with its reduced 2014 outlook, we are
downgrading DKS to HOLD from Buy and lowering our price target to
$49 from $67. The Q1 issues driven by poor performance in golf (-HSD)
and hunting (guns/ammo) are expected to persist through year end.
Moreover, current Q2 trends have continued to soften as golf is comping
down low teens while hunting is down high teens, resulting in a ~4.5%
comp headwind. Hunting faces tough but easing comparisons through
year end. DKS believes golf clearance activity will be confined to Q2, yet
we are less optimistic and believe markdowns could spill into 2H14.
What’s more troubling is the lack of visibility in golf and when it will
bottom out. While the 18% decline in the stock appears excessive, we
believe it will take time for DKS to recover its comp momentum, and
thus believe the shares will trade sideways until we see evidence of
stabilizing golf and hunting trends. Investment highlights
To combat negative traffic, the company will increase its
promotional cadence and advertising. As a result, Q2 guidance (62-
67c vs. our prior 83c est.) came in dramatically below our estimates.
On the positive side, athletic apparel/footwear and team sports did
well as the rest of the store comp’d up 6.6%. Valuation
Our $49 target is a blend of 15x 2015E EPS, 8x EBITDA, and DCF
CLUBBED BY GOLF: DOWNGRADING TO HOLD
We are downgrading DKS to HOLD from BUY. While DKS is a best-in-class retailer, we
believe there are both structural headwinds the company faces in golf and cyclical
headwinds in hunting (guns/ammo) that will result in depressed comps for the balance of
the year, mitigating the strength of other categories such as athletic footwear and apparel.
As such, we believe it is prudent to step to the sidelines as right-sizing these
underperforming categories will take time, particularly as DKS works through excess golf
inventory and demand resumes. Our price target goes to $49 from $67. In search for a bottom in golf
The issues with the golf category (~15% of the business) are two-fold. First, the
combination of persistently cold weather in Q1 coupled with a glut of inventory in the
channel depressed replacement purchases in Q1. As with any category in which there is a
build-up of excess inventory, DKS has begun discounting and believes it can work through
the excesses in Q2. That, however, is creating incremental pressure on pricing (AUR was
-16% in Q1 and units were -2%) as the discounting of older inventory is skewing demand
toward older inventory at the expense of newer technologies. Management suggested the
consumer does not understand the technological benefits the new clubs have. While that
might be true to some extent, we believe the customer is more heavily skewed by price. We
expect this negative cycle to persist through year end as inventory issues (and potential
margin pressures) always take longer to clear out than initially believed.
Second, structural concerns around the decline in rounds played are also troubling given
the sq. ft. allocated to the category (~8% of store sq. ft.). What’s more disconcerting is that
management does not know where the bottom in golf is. While we appreciate the candor, it
is nonetheless troubling to hear. To date, DKS remains committed to the golf category but
is actively reducing the sq. ft. allocated to it in-store in favor of women’s and youth
apparel. We support this decision; however, it may not be enough to fully offset the
declines. Hunting facing a year of tough comps
Hunting, and more specifically guns/ammo (~15% of business), is facing difficult
comparisons this year due to the acceleration in purchases over the last couple of years
that were driven by fears of potential legislative changes to gun ownership laws. While this
appears to be more of a cyclical issue than anything else, it remains a headwind for the
balance of the year. 2017 goals likely get pushed out one year or more
Consumer & Retail — Footwear and Apparel SOLID Q1 SALES MOMENTUM; UPDATING EPS FOR STOCK SPLIT Investment recommendation
We are expecting another solid Q1 print from UA when it reports
earnings on Thursday, April 24 BMO. Our consensus 4c EPS estimate
could prove conservative by 1-2c as we believe solid apparel and
footwear sales will likely drive top line growth in excess of our 25.3%
estimate. Specifically, we believe apparel categories in women’s and
kids continued to lead the momentum as new product introductions (e.g.
Amour Vent) along with updates to existing apparel lines continue to
resonate well with consumers. Our store checks also suggest recent
footwear launches (e.g., the Speedform Apollo) were very well received,
supporting our belief that UA is making strong progress in the category.
We believe UA is one of the few outperforming brands in retail, and as
such we would use the recent 15% pullback to add to positions. Investment highlights
We believe gross margin will likely top our +88bps estimate, largely
due to the continued supply chain benefits partially offset by
stronger yet lower margin footwear sales. We believe the work UA
has done to enhance its supply chain by instituting a longer term
forecasting methodology is translating into higher fill rates and
more on time deliveries while not stressing the system.
Now that UA will have full visibility into its fall order book, we
expect FY14 sales/EBIT guidance to be raised, albeit modestly, as
has been the custom for the past three years.
Valuation
Our split adj. $60 target is a blend of 50x 2015EPS/25X EBITDA/DCF
COMPANY DESCRIPTION:
The Finish Line, Inc. offers performance and athletic
casual footwear, apparel and accessories for men,
through its United States specialty retail stores. In
addition to their retail locations, The Finish Line sells
merchandise through its website, finishline.com. The
company was founded in 1976 and is headquartered in
Indianapolis, Indiana.
All amounts in US$ unless otherwise noted.
Consumer & Retail — Footwear and Apparel HITTING ITS STRIDE; REITERATE BUY, $32 TARGET Investment recommendation
FINL posted a strong and clean Q4 beat of 87c vs. our 85c estimate.
Solid comps of 6.3% topped the consensus estimate of 5% despite
coming in shy of our 8% estimate, while impressive gross margin
expansion of 80bps (vs. our -60bps) drove a majority of the beat. As
expected, basketball (+mid-teens) was the key driver, while running
(+LSD) lagged due to the unfavorable weather resulting in footwear
comps +8.5%. Softlines comps were -6.7% as licensed NCAA apparel
was below plan, only partially offset by accessories and UA/North Face
apparel. Given well known challenges across retail, FINL managed its
business quite well, and we believe running is poised to re-accelerate
over the next few quarters. Looking to 2014, we continue to see multiple
top-line and margin drivers that include: improving running product
pipeline with multiple brands contributing (e.g., UA Speedform, NKE
Flyknit Free/Max, Adidas Springblade), continued basketball momentum
(Jordan and NKE), improving productivity out of M doors, and softening
occupancy expense. With these tailwinds, we view the company’s MSD
comp/HSD-LDD EPS growth guidance as conservative; reiterate BUY.
Investment highlights
Current QTD comp trends are +LSD; however, it is important to note
that the Easter comparison is negatively impacting that number.
After this weekend, we would expect comps to rebound back to
+MSD. We expect the March/April combined comp to be +MSD.
Valuation
Our $32 target is a blend of 15x 2014E EPS/7x EBITDA/DCF
COMPANY DESCRIPTION: Nike, Inc. designs, develops and markets footwear, apparel, equipment and accessories for men, women and children worldwide. NKE focuses on sports-inspired apparel, footwear and accessories. NKE was founded in 1964 & headquartered in Beaverton, Oregon
Consumer & Retail — Footwear and Apparel STRONG DEMAND TRENDS MITIGATED BY FX AND EXPENSES Investment recommendation
NKE reported F3Q results of 76c vs. our/consensus 66c/72c estimate. A push-out of World Cup expenses (+9c) into Q4 comprised the largest contribution to the beat (relative to our model). Additionally, stronger sales growth (+2c) and lower taxes (+3c) were partially offset by less gross margin expansion (-1c) and higher other expense (-3c). The solid sales momentum NKE is experiencing across product categories (e.g., basketball, running, footwear, apparel) and geographies (NA, Western Europe, and Emerging Markets) coupled with 14% futures growth, is impressive. That said, FX headwinds hurt Q3 results and will continue to mount through F2015 with added pressure from continued investments in women’s, DTC, and digital. As such, F2015 EPS growth is now likely at ~12% with little upside opportunity. Given NKE’s premium 24.5x valuation, we prefer to leverage its product strength via the retailers (FL and FINL) and as thus maintain our HOLD rating. Investment highlights Solid 14% futures were driven by outstanding growth in WE (+30% vs. our 25%), while NA (+9% vs. our 12%) showed early signs of deceleration (down 500bps sequentially). Also, we do not expect the rebound in China (-3%) to materialize until late F2015 given the new seasonal ship-in strategy that just began, despite clean inventories.
ASPs/DTC helped Q3 GM; however, product costs/FX muted the gains to 28bps (10bps below us). Mix should help Q4 by 50-75bps.
Valuation Our $71 target is a blend of 21x 2015E EPS / 14x EBITDA / DCF.
Urban Outfitters is a specialty retail offering fashion apparel, accessories, and home goods through around 500 stores, online, and catalogs. The company operates under the Urban Outfitters, Anthropologie, Free People (which includes a wholesale segment), Terrain, and BHLDN brands. A
URBN reported Q4 EPS of $0.59, $0.04 above our estimate and ahead of consensus of $0.54. The company generated 4bps of yr./yr. gross margin expansion, versus our forecast of a 31bps decline, which was largely offset by an SG&A expense rate that was 40bps higher than we had anticipated. A lower tax rate drove the bulk of the upside over our projection. We are maintaining our bullish stance driven by sustained fashion improvements and performance at the Anthropologie brand (41% of total C2013 sales). Q4 SSS increased 10% on top of +7%, and the brand’s level of markdowns was 20% lower yr./yr. despite the highly promotional environment that persisted in the quarter. Investment highlights
We expect a slow recovery at the namesake brand. We are modeling for Urban Outfitters’ (44% of total sales) SSS to decline 8% in Q1 on top of +6% as difficult weather and fashion misses continue to plague the brand.
Weaker UO sales push our Q1 EPS estimate $0.08 lower to $0.28. Prior consensus is $0.33. We are reducing our consolidated SSS forecast by 190bps to -0.8% on top of +9%. We now expect 141bps of SG&A expense deleverage versus our prior estimate of a 33bps improvement.
Our price target moves from $48 to $49 as rolling forward our DCF model one year offsets our reduced outlook
Dick’s Sporting Goods operates as a sporting goods retailer in the United States. It provides apparel, athletic shoes and accessories for sports. It also engages in e-commerce and catalog operations. Dick’s Sporting Goods was founded in 1948 and is headquartered in Pennsylvania
Consumer & Retail — Footwear and Apparel FLEXING ITS MUSCLE ACROSS ALL ASPECTS OF ITS BUSINESS: REITERATE BUY, NEW $67 PT Investment recommendation
Consistent with its preannouncement on February 10th, DKS reported Q4 EPS of $1.11 on a very healthy 7.3% comp (traffic +6.3% and ticket +1.6%) with merchandise margins up 33bps. We are most impressed with the strength of DKS’ e-commerce business (+53% in Q4) as well as its improving profitability profile, dispelling the fears of online competition eroding its share. As we look to 2014, the initial Q1 guidance (3%-4% comps and EPS of 51c-53c) looks appropriately conservative given tough weather dynamic with potential upside coming from apparel and footwear (UA/NKE predominately). We view the planned space allocation changes that will shift to higher margin/higher return categories (e.g. women’s/kids apparel) positively. These space changes will be completed ahead of back to school, suggesting potential upside to 2H comps and margins. Undoubtedly, DKS is operating well, and with strengthening aspects of its business (e-commerce, in-store comps, and its margin profile) we reiterate our BUY rating and $67 price target. Investment highlights
While e-commerce profitability is below that of stores (largely due to the fees it pays GSI), it is improving and should eclipse that of stores in 2017 (when the GSI contract terminates). Today, incremental improvements in fulfillment (ship from store, pick up in store, etc.) are already helping and should keep pace with the growth of e- commerce sales. That said, DKS continues to invest (-3c to 2014 EPS) in the multi-banner infrastructure of this important platform
Columbia Sportswear Company designs and distributes outdoor apparel, footwear, accessories and equipment in the US, LAAP, EMEA, Africa and Canada. The company sells its products through wholesale distribution channels, licensees and via a direct-to-consumer channel that includes retail stores, outlets, and e-commerce.
Target: US$75.00
Investment recommendation COLM reported solid Q4 adjusted EPS of $1.21 vs. our 98c (consensus of 92c). We recently raised our Q4 estimates on expectations of stronger sales in cold weather gear; however, COLM managed much healthier growth than we anticipated (+6.4% vs. our 1% estimate adding 6c to EPS). Gross margin was also a standout (+330bps) as full price selling at both DTC and wholesale drove 25c of the beat, partially offset by higher taxes (-8c). Inventory (-15%) is healthy at both COLM and at retail as evidenced by solid fall ’14 order growth (+DD). This was a solid Q4 in which COLM executed well. That said, full year 2014 guidance (15%- 17% sales growth on 8% EBIT margin) implies an EPS of ~$3.42 suggesting a valuation of 24x. Given the incremental $100M in expenses (e.g. Swire JV, marketing costs, ERP implementation, DTC), we are hard pressed to chase COLM here and thus maintain our HOLD.
Investment highlights The transition of the China JV with Swire is now complete, yet the expected 2014 EPS accretion has been lowered to 13c (we had estimated 25c of accretion). Excess inventory in the market and stepped up promotions are reducing COLM’s sales outlook in China.
Total organic sales ex-Swire are expected to be up ~8%, consistent with history and mainly driven by the US fall orders +DD, partially offset by -LSD spring ’14 orders due to weak Argentina/Venezuela.
Valuation Our $75 target is based on 20x 2015E EPS, 10x EV/EBITDA, and DCF.
I can’t resist the temptation to make an issue of the pants or the stock being the butt of jokes in poor taste.
LULU : NASDAQ : US$60.39 BUY Target: US$82.00
COMPANY DESCRIPTION:
lululemon athletica Inc. is a designer and retailer of
technical athletic apparel operating owned retail stores
primarily in North America and Australia. The company
offers a range of performance apparel and accessories
for women, men and female youth. Its apparel
assortment, including items such as fitness pants, shorts,
tops and jackets, is designed for healthy lifestyle
activities like yoga, running and general fitness.
Consumer & Retail — Footwear and Apparel FRUSTRATING BUT FIXABLE; LOWERING ’14 EPS, MAINTAIN BUY Investment recommendation
Despite a solid Q3 report (45c vs. our 41c estimate), LULU guided to a
highly disappointing flat Q4 comp implying a 1300bp two year
deceleration from Q3. Traffic issues (2/3) coupled with continued
product delivery delays (1/3) were the culprits. We surmise that
generally poor mall traffic (-5% in Nov. and -10% in Dec. thus far),
exacerbated by the poor comments by founder Chip Wilson, is at play
rather than competition taking share from LULU as Q4 comp guidance
with e-commerce would have been a strong +8%. We continue to view
LULU as a premier athletic retailer whose current setbacks, while
frustrating, are transitory. That said, the stock is likely to tread water in
the near term until the next catalyst (ICR) and/or Q4 earnings in March.
While LULU’s growth potential remains vast, it must begin to show
progress on the investments it is making or risk alienating more of its
customers. 2014 should be that year of improvement, and thus we
maintain our BUY. Investment highlights
We lowered our 2014 EPS estimate by 28c to $2.35 (20% EPS
growth) largely driven by a reduced comp outlook to 6.4% from
14.7% previously. Our new estimates assume no improvement in
the business (either in traffic or supply chain), an assumption we
view as highly conservative given our belief that none of LULU’s
current issues are systemic or competitively driven. Valuation
Our $82 target (from $90) is based on 35x 2014E EPS/20x EBITDA/DCF.
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