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Rapid Reaction
Rapid Reaction: Abercrombie & Fitch Co. (ANF – $45.47)
Q4 2012 Earnings Release
- In a way, we’re sad to see the markdown reserve go bye-bye. We believe that the disclosed markdown reserve gave those that actually read the SEC filings an ‘edge’ (very few).
Takeaway the accounting change and impairment charge, ANF delivered EPS of $2.21 in Q4 2012, again largely via the materially lower markdown reserve.
That said, we’re unclear what assumption ANF management may have made when deriving the $2.21 (non-GAAP and assuming retail method)?
Did the implied retail method markdown reserve drop from $72.3M at the end of Q4 2011 to $0.0M at the end of Q4 2012 (to derive the retail method $2.21 non-GAAP number)? If so, that would have inflated the $2.21 non-GAAP number a bit. Just food for thought.
- The cost method eliminates the markdown reserve (estimate of permanent reductions of retail selling price). The only reserve placed on inventory at the end of a quarter going forward will be to markdown product below cost if the company believes the retail selling price will be less than the average cost (called an “Lower Cost or Market” reserve).
For all intents and purposes, there will be zero or almost zero LCM reserve each quarter.
- The lack of a markdown reserve will greatly reduce the variability of the company’s earnings. No longer will there be a largely subjective (and many times material) reserve placed on the company’s inventory each quarter-end.
Frankly, the fashion-sensitivity and volatile levels of inventory that has been a staple at ANF over the years argues for the switch to the cost method. I applaud the switch. In a relatively steady (year-over-year) inventory level/markdown state, the retail method is preferable for an accounting purist. But, those attributes don’t define ANF.
- We disagree with ANF management’s assertion that the adoption of the cost method will “align its operational focus on realized selling margin as opposed to initial markup.”
The reality is that any astute retailer knows that all that matters is the margin as the product walks out the door (sometimes referred to as “maintained margin” or “merchandise margin”). Any knucklehead can drive initial markups higher by raising price points. But, the initial price does not matter.
If ANF management was historically focused on initial markup, shame on them.
- In addition, we’re not buying ANF management’s assertion that the switch to the cost method will allow for greater “comparability” of its financial results.
The fact is that its peers generally throw store occupancy, distribution, and buying team pay into their Cost of Goods Sold (or, some combination thereof). ANF does not. Comparability will not be enhanced other than the fact that the financial results going forward will be less volatile.
- The fact that ANF management disclosed the business interruption insurance amount of $4.8M (Hurricane Sandy) is super transparent. Most retailers hide the amount in SG&A Expense (offset) and event go so far as to claim hardship.
Breaking-out the store comp and DTC sales growth adds to the transparency (both domestic and international). That said, what happened to the “Operating Expense” slide in the company’s presentation that broke-out Store Occupancy and Other Stores & Distribution Expense? Hmmm.
- In our view, the lessened volatility of the company’s earnings may be the key takeway today.
Lots to work through today. Click here to find an updated EPS model that presents the restated numbers (full year FY 2010, quarterly FY 2011, and quarterly FY 2012). Our forecasting for FY 2013 takes into account the new presentation.
Look for more over the weekend.
Rapid Reaction: January 2013 Sales
Each month, we provide our clients an early analysis of sales disclosures on sales release Thursday. Below, are a few bigger picture thoughts that we published earlier this morning prior to the opening bell.
Comp Calc Methodology Results in Flawed, Optically Stronger Comp Sales in January 2013
- See attached for the full report and various comp ‘stack’ presentations.
- We have to shed a tear as the end of an era has come. Monthly sales reporting is largely coming to a close (although GPS announced this morning that they’ll continue to provide monthly sales results… with a monthly sales recording added as well).
At this juncture, it appears that BKE, CATO, COST, FRED, GPS, LTD, ROST, SMRT, TJX, and ZUMZ will continue to report monthly sales results. It’s worth questioning why these retailers will continue providing monthly comp sales results.
But, the variance of a company’s sales/earnings versus expectations is likely to materially increase as the sell-side analyst community will no longer have the benefit of updated sales numbers and/or profitability commentary each month (even if the results only provided a macro perspective). .
- Big picture, comp sales in January 2013 were much stronger than expectations. But, there’s a good reason for today’s relatively strong comp sales results.
The fiscal calendar in January 2013 versus January 2012 provided an artificial tailwind. Why? In fiscal January 2013, the month began on Sunday December 30th. In fiscal January 2012, the month began on Sunday January 1st. Therefore, fiscal January 2013 received the benefit of not having the first day of the month be a Sunday AND a holiday.
The calendar shift is the reason a few retailers suggest that the month of January 2013 started off ‘strong.’
In addition, many retailers (BONT, FRED, GPS, JWN, KSS, M, ROST, SMRT, SSI, TGT, and TJX) reported their January 2013 comp sales using a somewhat flawed methodology. They compared only the first 4 weeks of fiscal January 2013 versus the first 4 weeks of fiscal January 2012.
Excluding the 5th fiscal week of January 2013 in the comp sales calculation (versus the same exact week last year) likely excluded the worst fiscal week of the 5-week month in addition to receiving the benefit of the artificially stronger first week of the fiscal month (see above).
The following monthly reporting retailers provided a 5-week versus 5-week comp sales calculation for January 2013 (BKE, CATO, WTSLA, and ZUMZ). The reported comp sales for these retailers are “more pure” and should not be compared to the other monthly reporters (4-week vs. 4-week).
Rapid Reaction: Amazon (AMZN – $260.35)
Q4 2012 Earnings Release
This afternoon, AMZN reported a relatively impressive (for AMZN) profitability improvement in Q4 2012 versus LY. In the quarter, the company’s EBIT margin improved +41 Bps versus LY. This represents the first quarter since Q1 2010 in which the company’s profitability has improved versus the prior year.
The company’s profitability improvement in Q4 2012 versus LY (finally) reversed a long-term slide in the company’s trailing 4-quarter EBIT margin. See chart below.
That said, it’s amazing to see the below greatly diverging charts. The company’s GPM% has now reached an all-time high (at minimum, the last decade). Yet, the company’s SG&A expense rate continues to exceed an all-time high (at minimum, the last decade).
Rapid Reaction: Starbucks (SBUX – $54.57)
Q1 Earnings Release
- We’ll admit that we’re baffled as to how SBUX continues to drive comp store sales growth here in the Americas segment.
- In the Americas segment, Licensed Store revenue per average licensed store increased +5.0% in Q1 versus a +23.0% increase per average licensed store in FY 2011 (FYE Sep 2012).
Why the material drop-off per average licensed store in Q1?
- We wanted to see more Cost of Sales improvement in the Americas segment. The -58 Bps decline in Q1 compares unfavorably to the -95 Bps sequential decline in Q4.
- In the Americas segment, Depreciation & Amortization Expense per average company-owned store increased +5.2% in Q1 versus LY. In each of the last 2 fiscal years, Depreciation & Amortization Expense per average company-owned store declined.
Why the material increase in Q1 and does this imply a higher rate per average company-owned store going forward?
- Why the meager top-line growth in the Channel Development segment?
Management has guided to “continued strong growth” for the segment in the current fiscal year. Does management consider the +13.1% growth for the segment in Q1 “strong?”
- A lower tax rate than the company’s guidance boosted EPS by $0.02 in Q1.
- A year ago today (when reporting Q1 results), SBUX management raised its annual EPS guidance range. Today, no such luck.
Here’s what’s interesting. On July 26, 2012, SBUX management introduced a ‘preliminary’ annual EPS guidance range of $2.04 to $2.14.
Since that time, the company (1) ‘beat’ Q4 2011 (Sep 2012) guidance by $0.01, (2) raised the preliminary net new store target by +10 stores to 1,300, (3) suggested that a higher percentage of CAP segment stores would be company-owned versus licensed, (4) announced write-downs in the EMEA segment that will boost profitability, (5) repurchased a material number of shares in Q1, (6) reported a lower Q1 tax rate than its prior guidance, and (7) suggested that Evolution Fresh would be “slightly accretive” to EPS this year versus “slightly dilutive.”
Despite the modest EPS drivers above and the continuation of stellar top-line growth, the company still sits here today with essentially the exact same guidance range that the company provided in July 2012.
Simply, we believe that this points to very little, if any, EPS upside at SBUX versus today’s consensus estimates for the current fiscal year.
Rapid Reaction: December 2012 Sales
Each month, we provide our clients an early analysis of sales disclosures on sales release Thursday. Below, are a few bigger picture thoughts that we published earlier this morning prior to the opening bell.
December 2012′s Top-Line Saved by Week #5 – But, a Disastrous Merchandise Margin Month
- See attached for the full report and various comp ‘stack’ presentations.
- Big picture, comp sales in December 2012 were in-line to slightly above expectations. In December 2012, retailers generally reported comp sales results that were between +100 Bps to +300 Bps versus November 2012 (see attached table).
But, any top-line strength was likely accompanied by merchandise margin degradation. 7 retailers reporting monthly sales (17 total) lowered their Q4 2012 EPS guidance (CATO, FRED, KSS, M, TGT, and WTSLA).