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URBN: Fast Fashion is the Icing on the Cake

Urban Outfitters (URBN) just became the poster child for how a company should not to manage expectations after it has reduced guidance only a few weeks after an investor day.

On Thursday night Urban reported that comparable-store sales have remained negative into October. That shouldn’t come as a surprise if you’ve actually visited any Urban store during the quarter, as we’ve done, and have observed the chain’s heavier discounts of late.

In addition to a lack of sales recovery at the all-important Urban division — which the Street was expecting for some reason I cannot discern — margins will now miss expectations as well. It’s time to wake up and smell the coffee: The back-half-recovery story is over. Analysts are lining up to downgrade the stock this morning, but I would point out that earnings expectations are still too glass-half-full for a company in transition.

When Urban reports earnings, we will hear the usual excuses: weather; perhaps, even, Ebola.

But I will put on my fast-fashion cheerleading hat once again and tell you that teen retailers are simply getting their collective booty kicked by better and cheaper product coming out of Europe and in our own backyard — for instance, from H&MTopshop andForever 21.

Now throw in a company that is in the process of changing merchandising mix, changing its core customer and expanding store sizes (no, that is not a typo).

While Urban Outfitters is the best of the teen lot, it was only a matter of time until the brand would succumb to the same pressures that have already pummeled the rest of the group. That, again, is in addition to some serious transition risk.

I am sitting this one out.

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WMT: Watch Out Falling Prices and Margins

Published Oct 15

Wal-Mart (WMT) kicks off its analyst day this morning and may reveal quarter-to-date comps. My guess is similar to last year: Management will not let the cat out of the bag. After all, it is a safe assumption that store traffic continues to be negative, and offering up another comp data point distracts from the work that goes into management presentations focused on long-term strategy.

The good news is that expectations are low, particularly after J.C. Penney (JCP), Gap(GPS) and Family Dollar’s (FDO) recent results were less than inspiring. Wolverine(WWW) chimed in Tuesday as well, calling out the “tepid environment for soft goods.” The bottom line is if Wal-Mart has a negative sign in front of the comp when it reports earnings in mid-November, I don’t think anyone will be surprised.

So what will Wal-Mart serve up on analyst day? The low-end consumer remains under significant pressure with a reduction in SNAP benefits, underemployment and dismal wage growth. Throw protein food inflation into the mix and we expect WMT to focus on continued cost-cutting in order to plow savings back into pricing.

In addition, we expect to hear more about ecommerce progress, as WMT is trying to make up for a late start (progress could also mean more spending).

Finally, we expect the company to share progress on smaller-format stores — the key will be how well those new-format comps hold up.

Oh, and don’t forget the most important piece of the puzzle. Where will WMT go after pricing this holiday season? Note to the competition: Watch out for falling prices and falling margins.

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JCP New Leader Trades in Orange Apron for Full Plate

Published Oct 13, 2014

J.C. Penney (JCP) finally found its leader.

Marvin Ellison will leave his orange apron at Home Depot (HD) to join JCP Nov. 1st as CEO in training. He will officially take over August 2015. Ellison has an outstanding track record running stores at Home Depot and JCP is banking on the hope he can lead JCP back to sales growth. Ellison will be in training to take over and execute JCP’s plan recently announced during analyst day. Unless, after a year in training, Ellison sees things differently. Stranger things have happened.

Last week JCP announced that September comps had decelerated — yes, despite lower gas prices and home and apparel private label getting back on track.  The problem seems to be customers are coming into stores and expecting huge markdowns similar to last year when JCP got rid of Ron Johnson’s dirty laundry inventory that did not resonate with the consumer. Those clearance items are a thing of the past as JCP inventory is now back to where it should be. Does that mean positive comps were a short-term blip?

Short of give-away markdowns how does JCP get it done? As outlined during analyst day the company sees three major buckets of sales opportunity ($3 billion plus in total). Home certainly has more runway as the category used to represent as much as 20% of sales vs. 12-15% at present. Second, the company plans to focus on high-growth categories it has missed out on over the past five years including footwear, handbags, accessories, leisure wear and intimates. Transitioning your product line to more high-growth areas sounds like a plan, but that may take some time. Finally, JCP is setting its sights on omnichannel as the third bucket of growth. The online opportunity may be a bit optimistic. After all, the JCP customer is probably least friendly to shopping online next to the Sears customer.

JCP has found its leader and he has inherited a full plate. Potentially the biggest risk is the new CEO may find the search for sales growth is more expensive than the Street believes.

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COST: Costco Breaks the Cycle

Published Oct 8, 2014

Even though it is trading at a 24x multiple on a day where retail dinosaurs J.C. Penney(JCP) and Sears (SHLD) seem to be losing the good fight, Costco (COST) is looking pretty outstanding.

This morning, after months of incredibly consistent same-store sales but lagging profit growth, Costco reported a long-awaited earnings-per-share (EPS) beat. The naysayers on Membership Fee Income were proven wrong today as that metric beat handily, increasing more than 7%. Remember, Costco derives most if its profit from membership fees.

The other beat was due to gross margin, which increased 20 basis points, year over year. That metric is also important as food inflation has been a pressure that the company has not shifted to consumers — yet the company still showed improvement on product margins. The bottom line is that you can pick on the valuation of this company,  but where else in retail are you seeing a consistent 4% traffic increase combined with 2% average unit retail increases?

September comps (excluding gas and foreign exchange (FX)) also did not disappoint increasing 6% for the US. While some may point to the drag of cheaper gasoline prices on the headline comp number I would point out cheaper gas prices help consumers spend on discretionary items.

Costco is not just riding a retail wave. Consider Sam’s Club recent results. Traffic was negative for the most recent quarter and overall comps were flat. Clearly, cheaper membership fees at Sam’s are not a market share driver. As Sam’s is working on a cash back program to drive traffic and market share, I am not worried for Costco.

Simply put, the warehouse of treasure hunts has a higher income consumer (at $100,000) and those consumers are willing to pay a few more bucks for premium product, great prices and superior customer service. The fact that Costco actually pays its employees well doesn’t hurt. What is the saying? Happy wife, happy life. In retail translation, we say: happy employees, happy consumers.

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YUM : Chinese Consumers Chickening Out?

Original Publish Date Oct 7, 2014

(YUM) reports after the close tonight and all eyes will be on China after a supplier scandal emerged in the middle of July. This is the second consecutive year in which Yum! Brands has been hit by negative headlines driven by supply chain issues(think mixing expired chicken with fresh chicken). While this time around the supplier in focus represented a small portion of KFC’s meat supplies, the Chinese consumer is simply chickening out when it comes to fast food. As a reminder, McDonald’s (MCD) most recent comps in the Asia Pacific, Middle East and Africa (APMEA) region declined by 15%.

The most recent update from Yum! Brands showed that China comps fell by 13% in the third quarter. This implies comps dropped more than 25% post-scandal. The big question is: has the consumer made its way back to KFC registers during Q3? We suspect the answer is no, and as a result KFC might have to add back promotions in order to tempt the consumer.  That means beware of Chinese restaurant margins for the remainder of 2014.

The good news is expectations are on the floor when it comes to chicken in China and before the latest supply chain headlines, comps in the region were returning to robust growth, largely driven by an expanded menu. Going forward, the brand will add new items annually and refresh stores. While China is largely a wait-until-the-dust-settles story, don’t forget about the U.S. (25% of sales).

Yum! Brands’ big story on the U.S. side is Taco Bell. Most recently, the brand introduced breakfast, which helped drive a 2% rise in comps last quarter — but to be honest we would have expected a bit better than that, based on the new initiative. After a few quarters of distraction, however, the company seems refocused on the entire business. The company will need all hands on deck, as the fast food space has no shortage of competition at the moment. Things like new entrants, freebies, chains adding breakfast abound.

Not enough transition for you?  Add in a new CEO on deck, and that is a lot on this company’s plate.


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