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Global Research 19 February 2019
US Softlines Retail The Music Is Still Playing for Now
We think the Softlines rally can continue through Retail earnings season: Softlines" P/E has increased 13% YTD, but is still 5% below its 5-yr. avg. With US/China trade tensions seemingly easing, the tax refund benefit still to come, the near-term macro outlook still constructive (Softlines Industry Outlook) and most earnings report set-ups looking relatively benign, we think Softline stock P/Es can keep grinding back toward their means. However, looking into 2Q, as stimulus fades, compares get tougher and valuations likely look more normal, we wonder if this rally can last beyond April. We think FL"s 4Q18 EPS report will be a positive catalyst: UBS Evidence Lab data suggests FL had a strong 4Q. The company is likely benefitting from robust Nike momentum. We model FL delivering a 4% 4Q18 EPS beat and better-than-expected FY19 EPS guidance. We expect this to drive upwards EPS revisions and some P/E expansion. The options market is pricing in a +/- 12% jump. Our rating however, remains Neutral. We don"t see many catalysts beyond 4Q18 EPS an d F L " s
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an d F L " s P/E could sit above its long-term 13x avg. by that time. TJX and ROST 4Q18 EPS reports look like mild positives: We think both companies will beat Street 4Q18 EPS estimates. This should cause modest upward EPS revisions, although little P/E expansion since both stocks" P/Es are near 20-yr. highs. This is probably enough to nudge stocks higher near-term. However, we wonder how long the market will assign 12x EV/EBITDA multiples to stocks growing EBITDA at just +MSD rates in an almost ideal off-price environment. We doubt this situation persists LT. Plus, we think the Off-Price channel will have more difficulty taking share in the future than the market expects. We rate TJX Sell. We see mostly balanced risk/rewards for department store earnings: Department store expectations look low, judging by multiples which remain near 5-yr. trough levels. However, we doubt 4Q18 reports catalyze positive stock moves since these companies are unlikely to say anything which changes the market"s view that department stores face LT challenges. The same is also true for specialty retailers such as LB. We actually see a slightly unfavorable set-up for GPS. Much more detail inside. Jay Sole
Analyst jay.sole@ubs.com
+1-212-713 3559 Carlos
Castellanos, CFA
Associate Analyst
carlos.castellanos@ubs.com
+1-212-713 1435 Eddie Ryan, CFA
Associate Analyst
eddie.ryan@ubs.com
+1-212-713 9028
www.ubs.com/investmentresearch
This report has been prepared by UBS Securities LLC. ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON PAGE 33. UBS does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Americas Equities Retailers, Specialty
Contents Quick reference tables .................................................... 2 Earnings calendar ................................................................................... 2 UBS Estimates vs. Consensus ............................................................... 3 Softlines valuation table .......................................................................... 3 American Eagle (AEO): We see neutral event ahead ................ 4 Foot Locker (FL): Lean bullish ........................................... 7 Gap Inc. (GPS): Lean bearish ........................................... 10 Nordstrom (JWN): We lean slightly bearish ......................... 13 Kohl"s (KSS): We see a neutral event ahead ......................... 16 L Brands (LB): We see a neutral event ahead ....................... 19 Macy"s (M): We see a neutral event ahead .......................... 22 Ross Stores (ROST): Lean very slightly bullish ...................... 25 TJX (TJX): Lean very slightly bullish .................................. 28
Quick reference tables Earnings calendar Figure 1: Earnings calendar
Company
Ticker Date
Day
Time American Eagle AEO 3/6/2019
Wednesday TBD Foot Locker FL
3/1/2019
Friday BMO Gap GPS
2/28/2019
Thursday AMC
Nordstrom JWN 2/28/2019
Thursday AMC
Kohl"s
KSS
3/5/2019
Tuesday BMO L Brands LB
2/27/2019
Wednesday AMC
Macy"s M
2/26/2019
Tuesday BMO Ross Stores ROST
2/28/2019
Thursday TBD TJX
TJX
2/27/2019
Wednesday BMO Source: Company data, FactSet, UBS Research
UBS Estimates vs. Consensus Figure 2: UBS estimates vs. consensus FQ1 UBS
Consensus Difference FQ2 UBS Consensus
Difference FY1 UBS
Consensus Difference
AEO $0.43 $0.42
+3.3%
AEO $0.22 $0.24
-6.1% AEO $1.48 $1.47
+1.0% FL
$1.44 $1.39
+3.6%
FL
$1.62 $1.62
+0.4% FL
$4.60 $4.54
+1.2% GPS
$0.69 $0.69
-0.3% GPS
$0.33 $0.41
-17.9% GPS
$2.55 $2.56
-0.3% JWN
$1.42 $1.43
-0.2% JWN
$0.52 $0.54
-3.5% JWN
$3.56 $3.56
+0.1% KSS
$2.19 $2.18
+0.8%
KSS
$0.61 $0.71
-13.8% KSS
$5.53 $5.54
-0.3% LB
$2.06 $2.07
-0.6% LB
$0.11 $0.13
-14.4% LB
$2.73 $2.75
-0.5% M
$2.54 $2.55
-0.7% M
$0.41 $0.39
+5.3% M
$4.00 $4.01
-0.4% ROST
$1.14 $1.13
+0.7%
ROST
$1.20 $1.18
+1.4% ROST
$4.20 $4.19
+0.2% TJX
$0.70 $0.68
+2.0%
TJX
$0.56 $0.58
-2.7% TJX
$2.45 $2.45
+0.2% Source: FactSet, UBS estimates
Softlines valuation table Figure 3: Softlines valuation table
UBS Ticker Rating Price 2/17/19
Mkt. Val.
($M)
Price Target Return
to PT
YTD Perf.
Sales Growth
FY0 FY1 (est.) FY2 UBS EPS (est.) FY0 FY1 FY2
FY0 P/E
FY1
FY2 5-yr. EPS
CAGR (e) PEG FY1 FY2 FCF Yield FY1 FY2 EV/EBITDA FY1 FY2 EV/Sales
(FY1) Div. Yield (FY1)
JWN Buy $44.44
$7,436
$66.00
48.5%
-6.2%
5%
3%
3%
$2.90 $3.56 $3.88
15.3x
12.5x
11.5x
13.8%
0.9 0.8
7.9% 9.4%
5.5x 5.3x
0.6x
3.3%
CPRI Buy 44.49
6,790
75.00
68.6%
-29.3%
5%
11%
18%
4.52 4.92 4.94
9.9x
9.0x
9.0x
9.2%
1.0 1.0
9.7% 10.6%
6.3x 5.8x
1.4x
0.0%
TPR Buy 35.91
10,413
52.00
44.8%
-18.8%
31%
3%
4%
2.64 2.56 2.95
13.6x
14.0x
12.2x
9.5%
1.5 1.3
7.0% 8.3%
8.3x 7.5x
1.7x
3.8%
AEO Buy 20.07
3,541
28.00
39.5%
6.8%
5%
6%
6%
1.16 1.48 1.70
17.4x
13.6x
11.8x
14.2%
1.0 0.8
6.6% 7.7%
6.2x 5.6x
0.8x
3.0%
SKX Buy 32.99
4,417
37.00
12.2%
-12.8%
11%
7%
6%
1.92 2.26 2.50
17.2x
14.6x
13.2x
10.4%
1.4 1.3
3.3% 6.1%
7.7x 7.1x
0.9x
0.0%
PVH Buy 112.90
8,550
145.00
28.4%
-17.7%
9%
7%
2%
7.94 9.55 10.50
14.2x
11.8x
10.8x
11.1%
1.1 1.0
NA NA 8.8x 8.1x
1.2x
NA TIF Neutral 90.83
11,072
90.00
-0.9%
-12.6%
4%
7%
2%
4.13 4.72 4.90
22.0x
19.3x
18.5x
8.0%
2.4 2.3
3.9% 4.4%
11.3x 10.7x
2.6x
2.4%
NKE Neutral
85.38
107,474
86.00
0.7%
36.5%
6%
9%
6%
2.39 2.72 3.25
35.8x
31.4x
26.3x
14.0%
2.2 1.9
4.0% 4.4%
22.0x 19.3x
3.4x
0.9%
LULU Neutral
151.09
18,528
148.00
-2.0%
92.3%
13%
24%
15%
2.59 3.80 4.55
58.4x
39.8x
33.2x
24.4%
1.6 1.4
2.0% 2.9%
23.3x 19.5x
5.9x
0.0%
VFC Neutral
86.90
34,378
85.00
-2.2%
17.4%
12%
12%
4%
3.14 3.81 4.25
27.6x
22.8x
20.5x
12.4%
1.8 1.6
4.2% 4.9%
16.5x 15.3x
2.7x
2.2%
KSS Neutral 65.93
10,887
72.00
9.2%
21.6%
7%
1%
1%
4.18 5.53 5.70
15.8x
11.9x
11.6x
7.8%
1.5 1.5
14.2% 11.7%
5.7x 5.6x
0.7x
3.7%
ROST Neutral 94.01
34,839
95.00
1.1%
17.1%
10%
6%
7%
3.55 4.20 4.50
26.5x
22.4x
20.9x
10.0%
2.2 2.1
4.3% 4.5%
13.8x 13.1x
2.3x
1.0%
UAA Neutral
21.16
8,279
23.00
8.7%
46.6%
4%
4%
5%
0.27 0.35 0.50
78.2x
59.9x
42.7x
28.5%
2.1 1.5
2.3% 2.4%
23.6x 19.4x
1.9x
0.0%
M Neutral
24.88
7,650
26.00
4.5%
-1.2%
-3%
0%
0%
3.79 4.00 3.50
6.6x
6.2x
7.1x
-2.7%
NM NM
16.7% 14.0%
4.4x 5.0x
0.5x
6.1%
FL Neutral 59.29
6,693
59.00
-0.5%
26.5%
0%
1%
1%
4.11 4.60 4.90
14.4x
12.9x
12.1x
5.0%
2.6 2.4
7.8% 7.5%
6.7x 6.6x
0.8x
2.3%
CRI Neutral 90.10
4,131
87.00
-3.4%
-23.3%
6%
1%
3%
5.75 6.02 6.40
15.7x
15.0x
14.1x
6.5%
2.3 2.2
5.8% 6.2%
9.9x 9.8x
1.4x
2.0%
GPS Neutral 25.07
9,563
26.50
5.7%
-26.4%
2%
5%
1%
2.13 2.55 2.50
11.8x
9.8x
10.0x
5.3%
1.9 1.9
8.8% 8.0%
5.0x 5.0x
0.6x
3.9%
LB Neutral 27.34
7,522
27.50
0.6%
-54.6%
0%
5%
1%
3.20 2.73 2.74
8.5x
10.0x
10.0x
0.9%
NM NM
9.2% 8.5%
6.8x 6.8x
1.0x
8.9%
HBI Neutral
18.77
6,784
19.50
3.9%
-10.2%
5%
2%
-2%
1.74 1.79 1.85
10.8x
10.5x
10.2x
3.3%
3.1 3.0
9.0% 10.7%
9.3x 9.5x
1.5x
3.3%
RL Neutral 125.09
6,597
127.00
1.5%
20.6%
-7%
2%
2%
6.03 7.05 7.75
20.7x
17.7x
16.2x
8.9%
2.0 1.8
6.7% 9.9%
8.6x 8.2x
1.4x
1.9%
TJX Sell 50.23
62,161
42.00
-16.4%
31.4%
8%
9%
5%
1.98 2.45 2.52
25.4x
20.5x
19.9x
7.9%
2.6 2.5
4.1% 4.4%
12.5x 12.3x
1.6x
1.5%
BURL Sell 162.81
10,975
133.00
-18.3%
32.3%
9%
10%
8%
5.77 6.46 7.00
28.2x
25.2x
23.3x
9.5%
2.6 2.4
3.6% 4.2%
15.0x 13.6x
1.8x
0.0%
Industry average
Industry median
6.6%
5.6%
6.1%
5.4%
4.5%
3.8%
22.4x 16.5x 18.7x 14.3x 16.6x 12.7x 9.9%
9.3%
1.9x
1.7x 1.9x
1.7x 6.7%
7.2%
6.6%
7.5%
10.8x
10.0x 8.7x
8.1x 1.6x 1.4x 2.4%
2.2%
Source: FactSet, UBS estimates
-8%
American Eagle (AEO): We see neutral event ahead Heading into earnings, please find our view on:
The stock: We doubt AEO"s 4Q18 report is a big catalyst. We do not expect AEO"s 4Q18 report to answer the market"s pivotal questions around AEO. Because of this, we doubt Street EPS estimates or the stock"s multiple change after the report. This limits the event"s ability to catalyze the stock, in our view. The market wants to know AEO can maintain +L-MSD comps through FY19 and leverage SG&A in 2H19. Since AEO is only likely to give 1Q19 guidance, the market will not likely get enough concrete data points to change its current view on these questions. We rate AEO Buy. Our view is the company will continue to comp strongly and leverage SG&A and the stock doesn"t price this in at just 12x FY19 EPS. However, we doubt this becomes clear until later in the ...