Key Takeaway:After pre-announcing negative comps this morning, the stock is down -13% but off the lows (opened -20%) after mgmt acknowledged that the six fewer shopping days had a worse than expected impact, but noted that January comps have bounced back to the +LSD% range and that noting structural has changed.
Bulls arguing that this presents an opportunity to buy into growth story (growing units, topline, and EPS near ~20%) and that next year should see the benefit of 2 extra Holiday selling periods + continued pricing benefits, which were a meaningful driver of ticket (+2%) this quarter. Management also noted that distribution costs should come down as they now have more scale. Customer response to the price increase has been fine.
With traffic down -4%, bears believe the stock is in the penalty box, especially since this is a growth company with a growth multiple, and mgmt should have expected / guided around the shortened holiday period. Therefore, going forward, execution / credibility will be key. Management also noted that Frozen 2 wasn’t as big as planned given the headwind of the fewer days, but didn’t take the opportunity to talk it up either. Tariffs remain a key risk, too.
Customer respond to price increase: They were very diligent in how they tested things out. They did hold back a couple markets. In all cases relative to the summer or the ones where they didn’t adjust pricing, it was all very consistent. They believe this was all due to the 6 less shopping days. Customer responding favorably.
Destination during holiday: Big impulse piece in the 4Q.
What went wrong with the forecast? In 2013, they saw that it was more impacted by weather and a much smaller company. They assumed the company would shop them more often with less shopping days.
Tariffs? Pricing is the last thing they want to raise. Feels like they are at high-water mark regrading tariffs. Collected 6 months of inventory subject to tariffs so even with a deal, they’ll need to work through that.
Guidance? High end of new guidance is near the low end of the original with 2c acquisition cost. Incentive base compensation big part of 4Q.
Expenses: Cost control helped them control EPS as they managed payroll. Benefit they saw with reduced sales was lower incentive comp b/c based on op income. Saw good cost control by reacting to lower traffic.
Frozen – it’s all embedded in the issue on traffic. Pleased w/ frozen but not as big as they planned. Will be part of their Easter plan.
Toys – weakest category but now behind the majority of the headwind.Inventory – seasonal stuff sold very well so no reason for write-downs. Roll fwd to end of year, inventory should be couple points above last year.
Price increase was meaningful to the ticket.