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Market Moving News + Research/Analysis/Opinion
For Monday, January 7, 2019
Published Daily by 11:30 AM ET
 
THIS WEEK'S CALENDAR
All Times Are Eastern
  • Monday, 1/7-- U.S./China trade talks begin in Bejing. ISM Non-Manufacturing Index for December due at 10:00 am, expectations are in the mid-58 area vs. a prior 60.7. Walgreens Boots to present at 6:00 pm ET at the JPM Healthcare Conference in San Francisco, Webcast available here.
  • Tuesday, 1/8 -- CES (formerly the Consumer Electronics Show) opens in Las Vegas, runs through Friday. CVS to present at 2:00 pm ET at the JPM Healthcare Conference, Webcast available here. FOMC Minutes for December due at 2:00 pm.
  • Wednesday, 1/9 -- Bed Bath & Beyond to report 3Q18 results after the close, call at 5:00 pm, Street at (0.2%) comps and EPS of $0.17. Costco reports December sales after the close, Street looking for 4.9% U.S. comps ex-gas. Zumiez reports December sales after the close, Street looking for 1.3% comps.
  • Thursday, 1/10 -- Target will provide a post-holiday financial update before the market opens, Street looking for 5.0% comps for all of 4Q18 and EPS of $1.52. December sales releases from Buckle (Street at -0.8%), Cato (no analyst coverage), Gap (Street at +0.8% comps consolidated), and LB (Street at +1.8% consolidated).
  • Friday, 1/11 -- CPI for December due at 8:30 am, expectations are for Core CPI in the 0.1%-0.2% area vs. a prior 0.2% reading.

TODAY'S EARLY TRADING
  • The S&P Retail ETF (XRT) is up 1.4% vs. a 0.2% increase in the S&P 500 as of 10:05 am. There are no major directional drivers for the broader market as investors focus on mid-level U.S./China trade talks in Bejing.
  • PIR is the biggest retail winner, up 9%, then JCP (up 7%), PLCE (up 6%), PRTY (up 5%), and SFIX (also up 5%). FIVE is up 4% on an analyst upgrade, and DLTR is up 4% on activist interest.
  • FRAN is the biggest retail loser and is down 7%, followed by BIG (down 4% on a Morgan Stanley downgrade), SHLD (down 3%), VSI (down 2%), and AZO (also down 2%).
 
  • LAST WEEK: The XRT increased 3.7%, well ahead of the S&P 500's 1.9% gain. Retail stocks were particularly strong on Friday in reaction to the much better-than-expected December jobs report and indications from the Fed that it will be patient with interest rate policy.
  • Excluding SHLD, which is in bankruptcy, PIR was the biggest retail winner with a 39% gain, then FRED (up 25%), GME (up 24%, largely in response to a WSJ article suggesting a possible sale of the company), BGFV (up 20%), and BKS (up 17%).
  • SSI was the biggest loser, down 27%, then FRAN (down 12%), PLCE, and DECK (both down 5%), and URBN (down 3%).
 
TODAY'S MARKET MOVING NEWS
  • Dollar Tree (DLTR) Activist Starboard Value discloses a 1.7% stake in the company, sends letter to CEO Gary Philbin and the board of directors, seeks majority control of the board. In its letter, Starboard says it believes Dollar Tree is deeply undervalued and outlines two opportunities it believes the company should pursue. The first is the exploration of all strategic alternatives for the underperforming Family Dollar business, including an outright sale. The second is an evaluation and initiation of a test of a multi-price point strategy at the Dollar Tree banner. Starboard's 11-page letter here.
  • Dollar Tree (DLTR) responds to Starboard's letter, says it welcomes constructive input from shareholders but notes that Starboard's nominations for a majority of the board were made without seeking any engagement or making any communication to the company. Press release here.
  • Five Below (FIVE) is upgraded from Equal Weight to Overweight by Morgan Stanley, target raised from $113 to $118.
  • Big Lots (BIG) is downgraded from Overweight to Equal Weight by Morgan Stanley, target lowered from $43 to $33.
  • Amazon (AMZN) is initiated with a Buy rating and $1920 price target at Pivotal Research Group.
  • Sears (SHLD) is preparing to liquidate as chairman Eddie Lampert's $4.4 billion bid to buy 425 stores and other assets out of bankruptcy has been rejected according to sources, Bloomberg story here. Lampert may revise/improve his earlier plan before tomorrow's court hearing and has also offered a back-up plan that could save a smaller group of stores and some brands.
  • Sears (SHLD) has chosen liquidation firm Abacus Advisory Group to sell its vast inventory and store fixtures if Lampert's efforts ultimately prove unsuccessful. Fashion Network article here.
 
INDUSTRY NEWS, VIDEOS, ETC.
  • Strong holiday 2018 sales -- up 5.1% to $850 billion according to Mastercard SpendingPulse, best number in six years -- were driven in good part by the success of omni-channel initiatives including buy online, pick-up in store (BOPIS), which grew 47% according to Adobe Analytics. Retail Dive story here.
  • The U.S. Bankruptcy Court in the District of Delaware has approved David's Bridal's restructuring plan that includes a $450 million debt reduction and the ongoing operation of more than 300 stores. Chain Store Age article here.
  • Stop & Shop, a division of Ahold Delhaize USA, is acquiring family-owned King Cullen Grocery and plans to close the transaction in 1Q19. King Cullen operates more than 30 supermarkets across Long Island and also owns five Wild by Nature stores. Stop & Shop has more than 400 stores across the Northeast. Chain Store Age article here.
  • Kroger has partnered with Microsoft to pilot two "connected experience" stores, and the companies will also jointly market a commercial Retail as a Service (RaaS) product. The pilot stores are near each company's HQ in Ohio and Washington and will introduce entirely new shopping experiences to consumers, including new digital shelf displays and guided shopping. Kroger's press release here.
  • Retail industry jobs in December 2018 were 37,600 higher than in December 2017 and 15,200 higher than in November 2018. Seasonal hiring came in slightly below the National Retail Federation's forecast, in part because of a very tight labor market. NRF release here.
  • If Sears survives the bankruptcy process, there will be just over 220 Sears' stores and just over 200 Kmart stores, mostly on the West Coast, Northeast, Mid-Atlantic, Florida and Texas, markets where land values are higher. The new geographic footprint suggests the company's plan is more about real estate than retail. CNN article here.
  • Growth in rental rates at malls and open-air shopping centers is slowing and could slow further in 2019. In the fourth quarter, mall rates increased 0.8% vs. a 1.5% increase for all of 2017 and a 2.0% increase in 2016. Limited construction has helped support rates against high-profile store closures, but the macro backdrop could be tougher next year. WSJ story here, subscription required.
  • NREI offers its 10 predictions for the retail real estate sector in 2019 in this slide show, thinks the worst is over for retail bankruptcies, sees online retailers adding more physical stores, looks for a reinvention of the toy market.
  • Saks is closing its women's store in lower Manhattan after only two years even as Neiman Marcus prepares to open its first store in Chelsea later this year and as Nordstrom gets ready to open a 320K square foot women's store in Midtown. Bloomberg article here.
  • Target will expand its Shipt same-day delivery service to all major merchandise categories in 2019 after an aggressive nationwide expansion last year. The service is currently available in more than 200 markets in 46 states and covers about 55K items. Minneapolis Star Tribune article here.
  • On Friday afternoon, Lowe's announced plans to hire more than 65K associates in 2019, including 50K+ seasonal positions, nearly 10K permanent associates, 6K full-time assistant store managers and department supervisors, and 2K+ technology positions. Company release here. Chain Store Age article here includes add'l insight.
  • Women's plus-size apparel retailer Fullbeauty Brands plans to file Chapter 11 around February 4 in New York and cede control to its senior lenders, including Oaktree Capital and Goldman Sachs. The bankruptcy would eliminate about $900 million in debt and allow the company to continue operating. Fullbeauty is currently owned by Apax Partners and Charlesbank Capital. Bloomberg story here. Retail Dive story here, includes more color on the plus-size marketplace.
  • January is no longer the post-holiday clearance month it once was as discounting year-round has become more prevalent. Instead, more retailers are using January to introduce new products or to push active/wellness merchandise as consumers focus on their New Year's resolutions. Fashion United article here.
  • Convenience stores (C-stores) had a good year in 2018 and are optimistic about 2019 according to a National Association of Convenience Stores (NACS) sentiment survey. The biggest concern for C-store operators appears to be finding talent in a tight labor market. Chain Store Age article here.
  • The WSJ writes on RH's surprising turnaround, story here, subscription required, notes the company's revamped business model and an aggressive, debt-supported share buyback that crushed short sellers.
 
MACRO/CONSUMER NEWS
  • The December U.S. ISM Non-Manufacturing Index was released at 10:00 am this morning and came in at 57.6, slightly below the consensus of 58.5 and down from 60.7 in November. The reading on new orders was 62.7 vs. November's 62.5.
  • The government shutdown could result in severe reductions to food stamp assistance for nearly 40 million Americans, and more than $140 billion in tax refunds could be frozen or delayed according to the Washington Post, story here. Retailers with high exposure to lower-income consumers, including Walmart and the dollar stores, could be particularly vulnerable in our opinion.
  • From Last Week: Non-farm payrolls increased 312K in December, well above expectations of ~180K and the best number since last February. The November figure was revised up 21K to 176K, and October was revised up 37K to 274K. The unemployment rate rose from 3.7% to 3.9% on a 0.2 ppt increase in the participation rate, which rose to 63.1%, its highest level since September 2017. Average hourly earnings increased a slightly better-than-expected 0.4%.
  • From Last Week: The December ISM manufacturing index fell 5.2 ppts to 54.1 vs. expectations of 57.8. It was the biggest decline since 2008 and incorporated weakness in most components. Commentary centered around slowing global growth and China tariffs.
  • From Last Week: December private payrolls were much better than expected according to ADP/Moody's. Payrolls increased by 271K during the month vs. expectations of around 180K. It was the biggest monthly gain since February 2017. CNBC story here.
  • From Last Week: Mortgage applications fell 9.8% at the end of last week from the prior two-week period according to the Mortgage Bankers Association. Volume was down more than 20% from LY and the lowest in 18 years. CNBC story here.
  • From Last Week: Initial jobless claims rose at the end of November, in part because of the partial government shut-down. The reported 231K was more than 10K higher than expectations. MarketWatch story here.
  • Article from Footwear News here discussing the potential implications of weakening Chinese manufacturing on the U.S. economy.
  • Good macro/consumer article here from the Detroit Free Press. Discusses issues that could impact consumer spending in 2019, including gas prices, minimum wage increases in some states, the trade dispute with China, potential for smaller tax refunds, and mortgage rates.
  • Good, in-depth article from Coresight here on China's slowing economic growth and slowing consumer spending, notes that retail sales in November grew 8.1%, the slowest rate in 15 years.
  • Another in-depth article on slowing consumer spending in China, this one from the WSJ, here, subscription required. Notes that Chinese consumer confidence has been hurt by the shaky Chinese economy and the trade dispute with the U.S. Highlights rising costs for housing, education and health care, also notes that China has become the biggest market for many consumer, luxury and durable goods.
  • Article from Footwear News here on how the 116th Congress might impact consumers and retailers, includes comments from an American Apparel & Footwear Association EVP, discussion of the current trade dispute with China.
 
SELECT ANALYST ACTIONS
  • Advance Auto (AAP) Barclays upgrades from Equal Weight to Overweight, raises target from $170 to $205, believes a stable base has been established, notes the third quarter comp was the company's best since 2010.
  • Amazon (AMZN) Pivotal Research Group initiates with a Buy rating, $1920 price target, analyst sees the company's growth opportunity as mostly unconstrained (only 1% share of its total addressable market potential) and is favorable on future revenue and profitability looking at retail separately from AWS.
  • Big Lots (BIG) Morgan Stanley downgrades from Overweight to Equal-Weight, lowers price target from $43 to $33, now believes the company's transformation is likely to take longer than previously expected. Analyst sees elevated expenses as likely to continue and also sees margin pressures from freight and tariffs, thinks another earnings reset may be needed.
  • CarMax (KMX) Buckingham upgrades from Neutral to Buy but lowers price target from $84 to $76. Analyst acknowledges concerns about intensifying competition and same-store unit comps but sees several catalysts, including continued earnings growth, strong used vehicle values, easing comparisons, the rollout of a nationwide omni-channel strategy, buybacks, and potentially reduced Fed tightening.
  • Dollar General (DG) KeyBanc upgrades from Sector Weight to Overweight, sets $125 target.
  • Five Below (FIVE) Morgan Stanley upgrades from Equal Weight to Overweight, raises target from $113 to $118, views the company as best-in-class with a differentiated, defensible concept. Firm raises its long-term comp growth forecast.
  • Kirklands (KIRK) KeyBanc downgrades from Overweight to Sector Weight, believes hardlines investors need to be increasingly selective in 2019, remains most negative on home furnishings given competitive and cyclical issues.
  • RH (RH) KeyBanc downgrades from Overweight to Sector Weight, believes hardlines investors need to be increasingly selective in 2019, remains most negative on home furnishings given competitive and cyclical issues.
  • Target (TGT) Telsey maintains Outperform but lowers price target from $100 to $86 on a lower forward multiple of 15x vs. a prior 17.5x. Firm sees sustainable low-single-digit comp growth and mid-single-digit EPS growth, sees improvement vs. competition on price (Walmart), merchandising (dept stores) and delivery (Amazon).
  • Ulta Beauty (ULTA) JPM maintains Overweight and $345 target, adds to firm's U.S. Equity Analyst Focus List, cites unit growth, share gains and concept's differentiation vs. competitors.
  • Urban Outfitters (URBN) JPM downgrades from Overweight to Neutral, lowers target from $50 to $38, cites valuation and slowing comps at Anthro.
  • Urban Outfitters (URBN) Deutsche Bank upgrades from Sell to Hold.
 
THE WEATHER
It's another relatively mild day across the country today as temps are expected to push into the 40's and 50's in northern states and rise into the 60's and high 70's across the South. There's rain across the Midwest and Ohio Valley and in parts of California and the Pacific Northwest, also snow in the western mountain regions. Other areas are generally dry, with a mix of sun and clouds.
The forecast for the next couple days calls for a mix of rain and snow across the Midwest and Northeast, rain on the West Coast and continued snow in the western mountains, and generally dry conditions across the middle of the country down into the Southeast.
Source for Weather Maps: The Weather Channel
Sources Include but Are Not Limited to: Company Websites and SEC Filings, FactSet (all "consensus" estimates, also referred to as "expectations," or the "Street"), Briefing.com, Money.Net (mostly for analyst actions), Retail Metrics (certain same-store sales estimates as noted), The Wall Street Journal, CNBC, Bloomberg, MarketWatch, TheStreet.com, Barron's, Reuters, AP, The Weather Channel, Chain Store Age, Retail Dive, The National Retail Federation, NPD, Fashion United, Women's Wear Daily, The New York Times, The Washington Post, Other Publications as Indicated, The Daily on Retail as Indicated.
ABOUT THE DAILY ON RETAIL
 
The Daily on Retail is a daily subscription newsletter oriented toward investors and retail executives looking for a "OneSource" destination for the most important company and industry news. We closely follow more than 150 retailers from A to Z (Abercrombie to Zumiez) and spend the majority of our time on names most relevant to institutional investors and retail industry professionals. We publish every day by 11:30 am ET and try to capture all the morning's (and prior afternoon's) most important news, plus we offer occasional proprietary research/analysis/opinion on high-impact topics across the sector. We provide a weekly calendar with key information, including Street expectations, and we highlight relevant macro/consumer news and select analyst actions. We also closely monitor any weather developments that could affect consumer spending patterns.
Patrick McKeever has followed retail for more than 20 years. Prior to founding The Daily on Retail in late 2018, he spent 11 years as a managing director, senior analyst and consumer sector head at MKM Partners. He has received a number of professional awards, including 2nd place in Multiline Retail for both stock picking and earnings estimation in the 2016 Thomson Reuters poll. He was awarded Top Stock Picker in Multiline Retail in the same poll, has been recognized in the Greenwich survey and has performed well in the institutional money manager voting process. He appears on CNBC and other networks to discuss retail and has been quoted extensively by industry publications and the financial press. Patrick started his career in equity research at Credit Suisse in New York. He is a graduate of Boston College and also has an economics-focused master's degree.
Disclaimer: The Daily on Retail constitutes a financial newsletter of general and regular circulation which does not offer individualized investment advice attuned to any specific portfolio or any person’s particular needs.  No mention of a particular security in The Daily on Retail constitutes a recommendation to buy, sell, or hold any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any reliance you place on such information is strictly at your own risk.  BEFORE SELLING OR BUYING ANY STOCK OR OTHER INVESTMENT YOU SHOULD CONSULT WITH A QUALIFIED BROKER OR OTHER FINANCIAL PROFESSIONAL TO VERIFY PRICING INFORMATION AND TO SOLICIT ADVICE AS TO THE APPROPRIATENESS OF A GIVEN TRANSACTION OR INVESTMENT.

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