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

Dick’s Sporting Goods


NYSE : US$56.67 
BUY  Target: US$67.00


Dick’s Sporting Goods operates as a sporting goods retailer in the United States. It provides apparel, athletic shoes and accessories for sports. It also engages in e-commerce and catalog operations. Dick’s Sporting Goods was founded in 1948 and is headquartered in Pennsylvania

Investment recommendation

Consistent with its preannouncement on February 10th, DKS reported Q4 EPS of $1.11 on a very healthy 7.3% comp (traffic +6.3% and ticket +1.6%) with merchandise margins up 33bps. We are most impressed with the strength of DKS’ e-commerce business (+53% in Q4) as well as its improving profitability profile, dispelling the fears of online competition eroding its share. As we look to 2014, the initial Q1 guidance (3%-4% comps and EPS of 51c-53c) looks appropriately conservative given tough weather dynamic with potential upside coming from apparel and footwear (UA/NKE predominately). We view the planned space allocation changes that will shift to higher margin/higher return categories (e.g. women’s/kids apparel) positively. These space changes will be completed ahead of back to school, suggesting potential upside to 2H comps and margins. Undoubtedly, DKS is operating well, and with strengthening aspects of its business (e-commerce, in-store comps, and its margin profile) we reiterate our BUY rating and $67 price target.
Investment highlights 

While e-commerce profitability is below that of stores (largely due to the fees it pays GSI), it is improving and should eclipse that of stores in 2017 (when the GSI contract terminates). Today, incremental improvements in fulfillment (ship from store, pick up in store, etc.) are already helping and should keep pace with the growth of e- commerce sales. That said, DKS continues to invest (-3c to 2014 EPS) in the multi-banner infrastructure of this important platform

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.

LULU : NASDAQ : US$69.84
Target: US$90.00

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.
All amounts in US$ unless otherwise noted.

Consumer & Retail — Footwear and Apparel
Investment recommendation
We expect LULU to report solid Q3 results on Thursday, December 12th
with upside to our 6% comp/41c EPS consensus estimate likely. Recall
we met management with two-and-a-half weeks left in Q3, and our take
from those meetings was that product flow to stores had begun to
improve ahead of schedule as the onboarding process of a second mill
was progressing at a pace faster than expected. We expect this stepped
up pace of production to modestly help Q3 comps, but more likely boost
Q4 comps as the timing of deliveries seems to be pacing with seasonal
demand. Also, gross margin could surprise to the upside as we believe
clearance levels moderated through the quarter and into Q4. In our
opinion, Q3 should be the quarter in which concerns around demand
and competition are laid to rest. We reiterate our BUY and $90 target.
Investment highlights
 Given still choppy mall traffic trends, we are not anticipating an
update to Q4 HSD comp guidance. That said, our checks suggest
sales trends have improved in early Q4 with the arrival of new
seasonal products (e.g. the scuba hoodie line), and thus makes the
decelerating two-year comp guidance look highly conservative.
 As for the CEO search, we are not expecting any definitive news
until after the holiday season, likely making an announcement a
February event.
Our $90 target is a blend of 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.

Tiffany & Co. SELL

TIF : NYSE : US$78.24
Target: US$65.00

Tiffany & Co. is the parent corporation of jeweler and specialty retailer Tiffany and Company. Through its principal subsidiary Tiffany offers an extensive assortment of jewelry, as well as timepieces, crystal, sterling silverware, and accessories.

Consumer & Retail — Specialty Retail
Investment recommendation
We expect TIF will report a 65bps yr./yr. improvement in gross margin when it releases Q3 results on November 26, the second straight quarter of expansion following seven consecutive periods of declines. The company should be seeing some benefit from price increases introduced in Q1, and metal and diamond cost deflation is starting to flow through the P&L statement.

We analyzed the potential upside from sustained commodity cost deflation. Based on a composite we compiled, we believe that as this lower-cost product flows through inventories, it would add about 60bps incremental gross margin in FY14, and we are raising our EPS estimate by $0.12 to $4.01. We do not think this is sufficient for a rating change. Our FY14 EPS estimate remains $0.09 below consensus, and the $65 price target generated by our DCF model, up from $57, still indicates notable downside.
Investment highlights
 We expect weaker sales of silver product will remain a gross margin headwind. We think this higher-margin product has been a victim of stale fashion in recent quarters.
 TIF trades in line with the luxury group despite slower projected growth. We expect sales and EPS will grow at compounded annual rates of 5% and 12%, respectively over the next three years versus the group averages of 10% and 13%.

Canadian Tire Corporation Ltd.

No Longer ” Crappy Tire” )

CTC.A : TSX : C$96.97
Target: C$109.00 
Canadian Tire is Canada’s most shopped general merchandise retailer, operating stores under the Canadian Tire, Mark’s, and PartSource banners. Through Canadian Tire Financial Services the company also manages a portfolio of credit card receivables.
All amounts in C$ unless otherwise noted.

Consumer & Retail — Merchandising
Investment recommendation
We are reiterating our BUY rating and C$109.00 target price following Canadian Tire’s Q3/13 earnings results.
Investment highlights
 Canadian Tire reported Q3/13 earnings results on Thursday morning, before the market open. Revenue increased 4.5% YoY to $2,956 million. EPS of $1.79 was in-line with our estimate, and above consensus of $1.76 and last year at $1.61. The company also announced a 25% increase to its quarterly dividend to $1.75 per share.
 Retail appeared to be firing on all cylinders during the quarter, with healthy same-store sales growth at all banners. CTR, Forzani, and Mark’s delivered 2.0%, 6.3% and 4.3% increases in same-store sales, respectively. At CTFS, a 118 bps YoY decline in write-off rates to 5.74% allowed the company’s return on receivables to increase to 7.21% from 6.68% last year. EBT at CTFS increased to $80 million, up 8.5% YoY.
 Looking forward, we expect continued strength at the company’s Retail division as we head into the holiday season, with management noting that inventories remain in a healthy position in advance of Q4/13. Furthermore, we believe investors will focus on the potential announcement of a credit card partnership over the next 12 months which we believe should unlock meaningful cash for Canadian Tire.
Our 12-month C$109.00 target price reflects our sum-of-the-parts valuation, whereby we value the company’s real estate, Retail division, and Financial Service division separately.

Foot Locker On Solid Ground

FL : NYSE : US$37.16
Target: US$39.00

Foot Locker is an athletic footwear and apparel retailer with over 3,400 stores across North America, Europe, and Australia. The company operates under various banners including Foot Locker, Lady Foot Locker, Kids Foot Locker, Champs Sports, Footaction, and CCS. The Direct-to-Customers segment sells athletic footwear and apparel through catalogs and e-commerce websites.

Consumer & Retail — Footwear and Apparel 
Investment recommendation
FL will report Q3 results on Friday 11/22 BMO. We are modeling EPS of 67c on a 3.5% comp vs. consensus at 66c on a 3.6% comp. While we believe basketball continued to sell well, we are cognizant of the disruption to comps the ~120 store remodels likely had. Given the ~50% divergence between industry data and FL comps in 1H13, we are not
anticipating a comp beat despite positive industry data and a strong increase in NKE basketball launches. We hope FL quantifies the Q3 impact from the remodels; if so, we believe investors would look through the disruptions now that this year’s remodel program is complete and the benefits begin to accrue to the company in Q4 and 2014. We thus
maintain our BUY rating and $39 target.
Investment highlights
 While we believe basketball strength continued its momentum with ~14 incremental launches during Q3, running was likely less of a contributor to comps since many of the new releases were distributed on a limited basis. That said, Europe looks to be improving and the RPG acquisition should add ~1-2c to Q3.
 Gross margin expansion is not likely given our expectations for soft apparel trends and IMU pressure from vendors.
 We believe a MSD Q4 QTD comp should be viewed positively,  particularly now that remodels are over, and compares ease.
Our $39 price target is based on 12x 2014E EPS, 6x EBITDA, and DCF.

Dick’s Sporting Goods

DKS : NYSE : US$55.83
Target: US$60.00

Dick’s Sporting Goods operates as a sporting goods retailer in the United States. It provides apparel, athletic shoes and accessories for sports. It also engages in ecommerce and catalog operations. Dick’s Sporting Goods was founded in 1948 and is headquartered in Pennsylvania.
All amounts in US$ unless otherwise noted.

Consumer & Retail — Footwear and Apparel
Investment recommendation
DKS will report Q3 results on 11/19 BMO. Despite recently elevated expectations, we see limited upside potential to our $0.38 (0% shifted comp) estimate vs. consensus at $0.39 based on our checks that suggest increased promotional activity was needed to spur traffic in the latter part of the quarter. While we believe footwear and apparel continued to
outperform aided by new UA, NKE, and North Face shops, we believe golf and exercise equipment continued to be drags on the business.

As  for gross margin, increased promotions coupled with DKS’ deliberate strategy to broaden its competitive position around opening price points could result in merchandise margin compression. As such we do not anticipate a change to guidance. That said, we are encouraged by the timely arrival of winter that has spurred traffic across retail and should help drive seasonal business at DKS. In our opinion, DKS continues to have a robust long term growth story, and with any normalization in weather patterns 2014 should present as an easy comparison. We maintain our BUY.
Investment highlights
 With ~68 NKE shops, 66 UA shops, and 80 North Face seasonal outposts opened in Q3, we expect  pparel/footwear to be additive to comp growth. We estimate UA alone added 1.3% to comp, while overall footwear likely benefitted from new running introductions.
 Golf, while expected to be only ~5% of Q3, is still facing headwinds as evidenced by weak Taylor Made results. Separately, we believe guns/ammo are beginning to decelerate as NCIS data was -2% y/y.

Under Armour Update

UA : NYSE : US$82.12
Target: US$92.00

Under Armour is a leading manufacturer of athletic apparel, footwear, and accessories. The company sells through wholesale channels of distribution, factory outlet stores, and through its e-commerce platform. Geographically, North America represents 94% of UA’s sales with the remaining 6% from international countries.

Consumer & Retail — Footwear and Apparel

Investment recommendation

We are expecting solid Q3 results from UA when it reports on 10/24 BMO. Despite generally inconsistent traffic at retail, athletic has been the outperformer with UA a key beneficiary of this trend, we believe. We estimate of 25% sales growth could prove conservative given new product intros at higher ASPs, accelerated shop-in-shop openings at DKS, and DTC growth. In addition, we believe modest gross margin upside stemming from the yet-unresolved Canadian duties issue could materialize. Separately, while UA has been vociferous about its intent to accelerate investments in international, resulting in less EPS flow-through, we believe this is more a Q4 event. As such, we are comfortable with our 69c EPS estimate (3c above the Street). With improving consistency in execution and sales momentum, we feel it appropriate to roll forward our valuation to 2015, resulting in our new price target of $92 from $76. We reiterate our BUY rating.
Investment highlights
 ColdGear Infrared (~$100M launch at 10%-15% higher prices), Alter Ego (first wholesale sell-in quarter), expanded Storm Fleece program, and a re-launch of bags should combine to propel sold sales growth in Q3. Also we expect ~60 new shop-in-shops at DKS to drive a significant sales lift that could contribute ~3c to Q3 EPS.
 While input cost comparisons are more difficult in Q3, we believe there could be modest upside to our -35bp gross margin estimate stemming from (1) better quality/margin excess product in outlets


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