GAP – don’t drop your pants BUY

GPS : NYSE : US$40.14

Target: US$47.00

Consumer & Retail — Specialty Retail



Investment recommendation
We are lowering our Q4 EPS estimate for GPS by $0.09 to $0.68,
below prior consensus of $0.77. There is more work to do in the
Gap brand (38% of TTM sales) than we had previously
anticipated, particularly in the women’s business. As a result, we
are lowering our consolidated SSS estimate from flat to a decline
of 2.4% on top of +1%. Our gross margin forecast moves 50bps
lower, and we now expect 59bps of expense deleverage on the
lower sales. Our BUY rating remains intact despite the near-term
headwinds. We continue to expect supply-chain initiatives will
drive gross margin expansion over the long term. This does not
appear priced in with shares trading at 13x our C2015 EPS
estimate and 7x C2015E EV/EBITDA.
Investment highlights
 Art Peck will begin his CEO stint with two new brand
presidents. Jeff Kirwan (10 years with GPS, recently as
president of Gap China) will take the reins from Stephen
Sunnucks at the Gap brand in December, and Andi Owen (19
years at GPS, recently leading the Gap outlet business) will
head up Banana Republic beginning in January, replacing
Jack Calhoun.
 Our price target moves from $51 to $47 as we incorporate
our updated estimates into our DCF model.

GAP Target Price $ 51


NYSE : US$37.90 BUY 
Target: US$51.00

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
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.

The Finish Line

FINL : NASDAQ : US$27.05
Target: US$32.00

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, The
company was founded in 1976 and is headquartered in
Indianapolis, Indiana.

All amounts in US$ unless otherwise noted.

Consumer & Retail — Footwear and Apparel
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.
Our $32 target is a blend of 15x 2014E EPS/7x EBITDA/DCF

Urban Outfitters


NASDAQ : US$37.51 
BUY  Target: US$49.00


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

Investment recommendation

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

Gildan Activewear Update

GIL : NYSE : US$52.51
Target: US$60.00

Consumer & Retail — Consumer  Products
Investment recommendation
We are reiterating our BUY rating and increasing our target price to
US$60.00 (from US$57.00) following better than expected Q1/F14
earnings results and reiteration of the company’s medium-term growth
Investment highlights
 Gildan reported Q1/F14 earnings results on Wednesday after the
market close. Sales increased 7% YoY to $451 million. EPS of $0.35,
after adjusting for one-time restructuring and acquisition-related
costs, was slightly above consensus of $0.34, and within Gildan’s
prior guidance range of $0.33-0.35. Gildan reconfirmed its F2014
guidance for sales of $2.35 billion, with $1.5 billion from the
company’s Printwear division and $825 million from the Branded
division, along with its EPS guidance range of $3.00-3.10.
 In November, Gildan announced intentions to begin construction on
a new manufacturing facility by Q3/F14, to support growth at its
Branded products division. The company stated it expects to have
selected a site and completed all related land purchases by the end
of Q2/F14. We look forward to the release of additional details and
believe that the facility’s capacity will be 20-30 million dozens,
which we estimate would add roughly $0.60-0.90 to EPS.
Our US$60.00 target price represents 19.2x our F2014E EPS estimate of
$3.13, or 17.5x our F2015 EPS estimate of $3.42. We believe Gildan’s
balance sheet positions the company to capitalize on accretive
acquisition opportunities, while capacity additions, healthy product
demand and cost cutting initiatives support healthy organic growth.


Hudson’s Bay Company

HBC : TSX : C$16.89
Target: C$22.50

The Hudson’s Bay Company is a leading North American department store retailer, operating stores under the Hudson’s Bay and Home Outfitters banners in Canada, and under Lord & Taylor in the United States.
All amounts in C$ unless otherwise noted.

Consumer & Retail — Merchandising
Investment recommendation
Hudson’s Bay announced the sale of its downtown Toronto location, along with its ownership of the ~400,000 square foot Simpson’s Tower to Cadillac Fairview for $650 million. Hudson’s Bay will lease the location back for a base term of 25 years, with renewal options for just under 50 years. After incorporating the transaction into our valuation, we are maintaining our BUY rating and increasing our target price to C$22.50 from C$21.00.
Investment highlights
 Utilizing an average $25 rent per square foot implies a 4.75% cap rate for the transaction. Incorporating the $650 million sale price, as well as the aforementioned increase in rent against our annual EBITDA estimates, our sum-of-the-parts valuation increases from C$20.33 to C$22.79.
 Assuming all proceeds are initially directed toward debt repayment, our fiscal 2014 year-end net debt/ebitda estimate falls from 3.9x to 3.2x, leaving Hudson’s Bay much more latitude to pursue Saks-related expansion plans and pursue additional growth opportunities.
 Concurrently, the company announced the locations of the first two Saks stores in Toronto. A full-line, multi-level Saks will be co-located with the current Hudson’s Bay location at Queen/Yonge and is planned to open in the fall of 2015. Also, the company plans to open a location at Sherway Gardens.
Our target price reflects our updated sum-of-the-parts valuation and represents 8.5x our F2014 EBITDA estimate of $$643 million. Although Q4/F13 appears challenging given both a heavily promotional environment and very unfavorable weather, HBC remains committed to reducing excess SG&A costs and leveraging the recent acquisition of Saks. Meanwhile, we believe investors will be rewarded through further monetization of HBC’s significant real estate assets during F2014

Black Diamond Update

BDE : NASDAQ : US$12.71
Target: US$20.00

Black Diamond Inc. is a leading provider of outdoor
recreation equipment and lifestyle products. BDE also
develops, manufactures and distributes a broad range of
products used for climbing, mountaineering,
backpacking, skiing, and various other outdoor recreation
activities under the Black Diamond and Gregory brands

Consumer & Retail — Footwear and Apparel
Investment recommendation
We believe BDE’s 10% sell-off yesterday was an overreaction to
commentary regarding apparel sell-thru in Q4 and investments in
marketing in 2014. During BDE’s product presentation at the Winter
Outdoor Retailer show, the company stated that apparel sell-thru in Q4
was mixed, strong in core technical markets (as expected), and mediocre
in urban markets (e.g. REI Soho). Our take is that apparel sales were
overall on plan (we estimate ~$2-3M in Q4). More importantly, BDE’s
plan to significantly expand its style count from 24 to 120, add a
women’s line, and expand retailers from 253 to 800 for fall ’14 is
unchanged. Also, the company spoke about increasing the marketing at
retail to enhance the brand’s presence in markets where it is less well
known. We are supportive of this investment in brand building as
having both technically sound, innovative product and a marketing
strategy that expands the brand’s reach is vital to the company’s long
term success. Our growth thesis is intact and we reiterate our BUY.
Investment highlights
As we have written about in the past, we believe BDE is positioning
its brand portfolio to focus on Black Diamond and POC, which could
result in the divestiture of Gregory. Should an announcement of a
sale come to fruition, it would be a significant positive as it would
result in a meaningful cash infusion that would likely fund growth
initiatives with no need to access the capital markets.
Our $20 price target is derived from our DCF analysis

Deckers Outdoor Corporation

DECK : NASDAQ : US$85.90
Target: US$111.00

Deckers Outdoor Corp. engages in the design, manufacture, and marketing of footwear and accessories for outdoor activities and casual lifestyle use. DECK distributes their goods through specialty retailers, department stores, outdoor retailers, sporting goods retailers and online retailers. DECK also sells directly to consumer through its websites and retail concept stores. The company was founded in 1973 and headquartered in California

Consumer & Retail — Footwear and Apparel
Investment recommendation
In this report, we discuss our view on how 2014 will unfold for DECK and the roadmap to 30% EPS growth. The crux of our increase in sales/EPS estimates is our improved outlook for 2014 wholesale orders. After discussions with our industry contacts, we believe a positive 2013 holiday season has given retailers renewed confidence in the winter boot category which should manifest in strong 2014 orders. In addition, DECK is making solid progress on its structural gross margin expansion plan that we believe is still in the early stages as both retail and UGG Pure penetration should increase through 2015. With both sales and gross margin accelerating coupled with our expectations for a much improved inventory position, we reiterate our BUY rating and are raising our 12-month price target to $111.
Investment highlights
 We now anticipate wholesale growth in 2014 to be +6% vs. our prior estimate for -1%; an estimate that could prove conservative given a turn in Europe and an improving assortment in Asia.
 While we expect Q4 results to produce a solid beat, we are not anticipating a pre-announcement at ICR since it is not customary practice (the last preannouncement was in 2008). That said, we expect positive commentary by management to be well received.
Our $111 target is a blend of 19x our 2015E EPS /12x EBITDA/ DCF

lululemon athletica inc. Update

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
Target: US$82.00

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
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.
Our $82 target (from $90) is based on 35x 2014E EPS/20x EBITDA/DCF.

Steven Madden, Ltd.

SHOO : NASDAQ : US$36.78
Target: US$41.00

Steven Madden, Ltd., together with its subsidiaries, designs,
sources, markets and sells fashion-forward footwear for women,
men and children. The company was founded in 1990 and is
headquartered in Long Island City, New York. SHOO has a
portfolio of brands that reaches globally among all economic
tiers. SHOO offers products through wholesale partners, an ecommerce
platform and its own retail stores.

Consumer & Retail — Footwear and Apparel
Investment recommendation
After spending last week with SHOO in their showroom previewing the
2014 spring product line, we came away positive on the level of newness
in the line that should bolster its competitive position next year. More
importantly, we believe SHOO’s wholesale customers were equally as
enthusiastic with what they saw. In particular, wedges with chunkier
heels, canvas sneakers with pony hair, and the Stingray Oxford booties
were standouts in our opinion. Interestingly, the chunky heel wedge is a
function of an emerging wider pant leg trend. ASP trends are looking to
be consistent with spring ’13; however, if the wide leg pant trend holds,
it could spur a significant increase in units next year. With plenty of new
fashion coming in 2014, we reiterate our BUY rating.
Investment highlights
 The persistent discounting in the mall by most retailers is driving
SHOO to respond with elevated promotions just to maintain its
competitive stance. As such, we have moderated our retail gross
margin estimate down by 30bps to 63.2%. Offsetting the
promotional impact to retail, however, is the market share gain in
wholesale, resulting in our wholesale footwear growth estimate to
increase to 12% from 11.5%. Auto-replenishment of on-point
fashion (e.g. Troopa bootie) is helping further its market position.
Our $41 target is based on a blend of 15x 2014E EPS/ 10x EBITDA/DCF.


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