Global Retail_ Global Retail Conference 2024 — Day 1 Takeawayspdf
Global Retail_ Global Retail Conference 2024 — Day 1 Takeawayspdf
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  1. Day 1 of our 31st Annual Global Retailing Conference revealed a better-than-fearedand cautiously optimistic tone on the outlook for the consumer into 2H. This slightlymore constructive tone was evident across sub-sectors where we heard fromseveral companies that back-to-school and early Halloween trends have beenhealthy. In particular, a resilient consumer continues to respond well to newness andinnovation. That said, we heard some concern about a condensed holiday calendar(consumers shopping after the election and with 5 less shopping days betweenThanksgiving and Christmas) and continue to see evidence of bifurcation betweenmarket share winners and losers amidst an inconsistent and choppy macrobackdrop, with commentary regarding competitive opening price points, astill-promotional backdrop (where a consumer is focused on value), and pressure onthe low income consumer as headwinds. Better-than-feared tone, with constructive updates on early back-to-school:Following a few early signs of retailers being pleased with back-to-schoolmomentum last week (GAP, BURL), we heard several constructive updates todayregarding back-to-school and early Halloween trends (URBN, SKX, FL, WSM, HD,and TSCO). Other retailers spoke to a resilient consumer (TSCO, TGT, BBY, FND, HD,BJ) or a customer that was showing some signs of incremental strength (FIGS). Value and innovation key: Consumers increasingly are responding well toinnovation and newness and are willing to pay for on-trend product even at morepremium price points (FIGS, SN, URBN, SKX, TSCO, BBY, FL). Strong innovation canalso drive strength in a company’s core product offering. However, outside ofnewness, the consumer remains choiceful and price-sensitive, and we heard severalretailers discuss select price reductions or promotions planned to optimize openingprice points to engage an inflation-strapped consumer (DG, EYE). Investments in marketing: Nearly every company spoke to incremental marketingKate McShane, CFA+1(212)902-6740 |kate.mcshane@gs.comGoldman Sachs & Co. LLCBrooke Roach, CFA+1(212)357-2421 |brooke.roach@gs.comGoldman Sachs & Co. LLCLeah Jordan, CFA+1(713)658-2691 | leah.jordan@gs.comGoldman Sachs & Co. LLCSusan Maklari+1(212)357-3906 |susan.maklari@gs.comGoldman Sachs & Co. LLCRichard Edwards+44(20)7051-6016 |richard.edwards@gs.comGoldman Sachs InternationalLizzie Dove+1(212)902-0097 | lizzie.dove@gs.comGoldman Sachs & Co. LLCChristine Cho+1(212)357-4594 | christine.cho@gs.comGoldman Sachs & Co. LLCGlobal RetailGlobal Retail Conference 2024 — Day 1 Takeaways5 September 2024 | 4:43AM EDTGoldman Sachs 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 thisreport. Investors should consider this report as only a single factor in making their investment decision. For Reg ACcertification and other important disclosures, see the Disclosure Appendix, or go towww.gs.com/research/hedge.html. Analysts employed by non-US affiliates are not registered/qualified as researchanalysts with FINRA in the U.S.
  2. investments as a driver of brand loyalty and engagement in pursuit of market sharegrowth (CRI / SN / VFC / FIGS / SKX/ WSM). Category commentary mixed: Commentary regarding big ticket remained mutedoverall (URBN, TJX) and some COVID-winning categories remain somewhat constrained(jewelry, home furnishings). However, signs of some greenshoots have emerged withsequentially strengthening growth in select categories like home electrics (SN), laptopsand computing (BBY) and apparel (TGT). Bifurcation in trends increasingly evident: We continue to see dispersion in retailperformance, as it is clear the retail backdrop is not a rising tide that is lifting all boats.Retailers exposed to the low-income consumer remain pressured (EYE, DG, FL) whilethose with a more diverse consumer are seeing a steady consumer and comp growth(TGT, BJ, WMT, TJX). Retail media: Many companies spoke to investments in retail media as a way toleverage their scale while providing a service and data to their vendors. Given thehigh-margin nature of this business, in some cases this is fueling incremental profitgrowth while in others these savings are being reinvested (WMT, DG, BBY, BJ, TSCO,TGT). Apparel and FootwearKey Takeaways on Carter’s Inc. (Coverage Suspended, authored by BrookeRoach)Panelists: We hosted Michael Casey, Chairman & Chief Executive Officer, RichardWestenberger, Chief Financial and Operating Officer, and Kendra Krugman, ChiefCreative & Growth Officer, from Carter’s, Inc. at the 31st Annual Global RetailingConference.Bottom Line: Management stuck a cautiously optimistic tone regarding the health ofthe consumer and trajectory of the CRI business moving forward, noting several actionstaken recently to improve momentum in the business into 2H. Within this, the companyexpects to drive an improvement in consumer engagement through top of funnelmarketing spend, investments in price, and distribution enhancements (includingstores).nWholesale trends: Management spoke about strength in their exclusive brandsportfolio (sold through Target / Walmart / Amazon), noting higher numbers of units asconsumers look for value and combine shopping trips. On wholesale, the companynoted expectations for good growth on both the seasonal and replenishmentbusiness in 2H (pointing to +MSD growth for wholesale fall/holiday bookings).nStore opportunity: Within DTC, the company noted it is testing “Best of Baby”smaller footprint stores with a curated assortment focused on a 0-5year old,enabling enhanced assortments of Little Planet, PurelySoft, and Skip Hop brands,with early tests going well. The company also spoke about opportunities for5 September 20242Goldman SachsGlobal Retail
  3. refreshing the fleet, especially around lease renewal and potential for acceleratedstore remodel pace over the next 3-5 years.nMarketing and personalization: CRI is investing in marketing in 2H (as discussedon their latest quarterly call). Within this, CRI launched a new brand campaign with athird party marketing provider in August and cited healthy early signs of customerengagement and traffic improvements. They’ve also distorted their mix of mediaspend towards top of funnel to drive marketing campaigns, and also are investing inthings like social media and connected TV.nPrice / promotions: CRI noted a barbelling effect in the market where consumersare engaging well with opening price points but also with premium items. Withinpricing, management is focused on strategically sharpening price points to engageconsumers in a choppy macro backdrop. On promotions, the company expects theindustry to remain promotional overall into the Holiday season, with CRI focusing itspromotional cadence toward larger shopping periods.nEmerging brands: The company highlighted strong recent results within itsemerging brands portfolio such as Little Planet and PurelySoft, and sees opportunityto grow these brands to $200mn+ in the future (from ~$100mn today) despite anarrow target consumer.Key Takeaways on FIGS Inc. (Sell, covered by Brooke Roach)Panelists: We hosted Trina Spear, Co-Founder & CEO, from FIGS, Inc. at the 31st AnnualGlobal Retailing Conference.Bottom Line: Management highlighted investments in product and marketing toincrease engagement and market share with both new and existing customers,including the company’s expansion potential into TEAMS, international, and newcategories. Near-term, the company highlighted seeing some signs of positive indicatorsof industry normalization such as repeat frequency / search volume, with innovationdriving a stronger core business.nCurrent trends/macro: Management spoke constructively about the long-termgrowth opportunity of the US and global healthcare apparel markets. Healthcareprofessionals pre-covid bought 4-6 sets of scrubs per year, increased to 8-10 sets inCOVID, and are currently in the 1-3 sets per year range. That said, the companyexpects this to normalize over time, and is beginning to see positive indicators ofrepeat frequency and search volume. Looking ahead, the company is focused oninnovation-led products and strong marketing campaigns to drive incrementalgrowth and customer acquisition. The company noted their innovation engine isworking faster than they initially thought, and this is driving incremental strength inthe company’s core business, as well.nMarket share opportunity: FIGS discussed opportunity to increase wallet share ofexisting customers and bring new customers into the brand through their layeringsystem, which includes on-shift and off-shift products. The company noted non-scrubcategories in the layering help engage customers outside of scrub replenishmentorders, which make up ~70% of revenue. Geographically, management highlighted5 September 20243Goldman SachsGlobal Retail
  4. opportunity to increase market share in their home LA market (20-25% penetration),as well as other key global cities through increasing brand awareness (with a recentbrand study suggesting 22% unaided awareness and ~50% aided awareness). Thecompany’s fit initiative is also an opportunity to scale its customer penetration.nTEAMS as a margin-accretive growth driver: Management spoke constructivelyon the opportunity to grow and scale their TEAMS business, which currentlyaccounts for ~MSD % of sales and grew ~50% last year. Within this, FIGS notedparticular opportunity in Europe given the higher mix of B2B business in the region.FIGS also highlighted the attractive margin profile of their TEAMS business, which ismore profitable than e-commerce given the efficiencies of fulfilling orders at scale.The company has also started investing in an outbound sales force to supportgrowth.nInternational expansion: The company discussed the agility they have as adigitally-native brand to read and react to demand in potential markets and onlychoose to extend into locations they know will be profitable. After initially enteringthese markets, FIGS noted localization is a key unlock to deepen penetration,including localized payment solutions, marketing, and products.nInvestments in distribution: FIGS discussed investments they’ve made inincreasing both their points of distribution and overall distribution efficiency,including expanding their physical store footprint to two community hubs (where40% of customers are new to the brand) and investments in automated distributioncenters, with one recently opened in Phoenix and one planned to open in Canadanext year. The company plans for these investments to increase engagement withthe brand and drive a more seamless customer experience.nMargin trajectory as innovation scales: The company acknowledged gross marginpressures from extending into more non-core and non-scrub categories, but notedtheir gross margin profile remains structurally advantaged. Further, the companyhighlighted opportunities for efficiencies as newer categories scale and reiteratedthat category expansion remains the right strategy for long-term, sustainablegrowth. In aggregate, management reiterated confidence in their ability to growEBITDA margin noting recent margin trends are at trough.We are Sell-rated on FIGS with a 12-month price target of $4.75 based on an 8.5xQ5-Q8 EV/EBITDA target valuation methodology. Key upside risks include: (1) strongersales momentum, (2) margin expansion, (3) stronger expansion into non-scrubs orinternational, and (4) a faster rate of share repurchases or other capital allocation uses.Key Takeaways on Guess?, Inc. (Not Covered, authored by Brooke Roach)Panelists: We hosted Dennis Secor, Interim Chief Financial Officer, and FabriceBenarouche, Senior Vice President of Finance, Investor Relations, & Chief AccountingOfficer, from Guess?, Inc. at the 31st Annual Global Retailing Conference.Bottom Line: GES spoke to the strategic and transformational changes to thecompany’s business model following the recently completed Rag & Bone acquisitionand launch of Guess Jeans. Looking ahead, the company sees opportunity to invest in5 September 20244Goldman SachsGlobal Retail
  5. marketing to support brands, and also in driving category and geographic expansion. Oncurrent trends, the company noted a consumer that is being prudent with spending.That said, the company expects to be less promotional this holiday in both the Americasand Europe.nAcquisition of Rag & Bone: Management highlighted the acquisition of Rag &Bone in partnership with WHP Global as a major growth opportunity. They plan toleverage the company’s global platform to expand Rag & Bone’s geographicpresence, particularly in Europe, Mexico, and the Middle East, and to introducemore product categories such as accessories and handbags.nLaunch of Guess Jeans: Guess talked about its recently launched lifestyle brand,Guess Jeans, which targets a younger, Gen Z audience with a more casual offeringat slightly lower price points. Management noted the brand is expanding acrossEurope and North America through both retail stores and wholesale partnerships,and management also stated the orderbook for Fall-Winter 2024 exceeded theirexpectation and an order book for Spring-Summer 2025 is close to completion.nHealth of the Consumer: The company noted that consumers in both Europe andNorth America are being more sensitive and prudent with their spending aseconomic pressures continue to weigh.nPromotional Strategy: Guess expects to be less promotional in 2H vs. last year,particularly in the European wholesale business, as inventory levels are betteraligned with demand. The company has focused on brand elevation andhigher-quality products, resulting in a higher average unit retail (AUR) compared topre-pandemic levels. The company also expects slightly lower promotions in theAmericas.Key Takeaways on ON Holding (Buy, covered by Richard Edwards)Panelists: We hosted Marc Maurer, Co-CEO, and Martin Hoffmann, Co-CEO & CFO,from ON Holding at the 31st Annual Global Retailing Conference.Bottom Line: Management discussed: 1) Sales: the company recorded close to thebest sales month ever; 2) The Atlanta warehouse automation disruption is now mitigatedby leveraging the West Coast facility, but they expect some more modest shippingdelays continuing in Q3, albeit sales trends have now re-accelerated from early 2Q; 3)ON continues to launch innovative products at higher price points and has seen noimpact from customers trading down; 4) Order book for 2025 remains strong andmanagement is very mindful in expanding wholesale partners as focus remains oninnovation and not lowering price points; and 5) They are positive about getting to c.10%China mix and are focused on DTC initiatives in APAC to manage margin and given aless developed premium wholesale channel.nBrand awareness: Management noted that awareness remains a big opportunityfor which athletes are helpful in establishing credibility. They track this very closelyand note that brand awareness is higher in certain community groups while there isopportunity in the others. Notably, the brand is under-represented in large sportinggoods retailers such as JD Sports, Dicks and Foot Locker.5 September 20245Goldman SachsGlobal Retail
  6. nProduct portfolio: ON is collaborating with gyms and certain celebrities to tap intothe community for the Training category, which they entered via apparel first. Tennisfollows a top-down approach where athletes drive credibility whereas trainingawareness is to be driven at the grassroots level. For scaling apparel, expandingtraining and tennis categories remains essential for growth.nInnovation: Lightspray innovation allows them to re-think the supply chain and thepossibility to reduce reliance on labor and manufacture locally, hence reducing leadtimes by automating the manufacturing process. This would also allow for fasterprototyping and designing products closer to market. ON is planning to rapidlyintroduce shoes using this technology (can make a shoe in 3 minutes using robots),with a notable launch event at the New York marathon in November.nPricing: Management is confident of the brand growing in the premium categoryand has not been impacted by consumers trading down. 50% of the products in2021 were $150 or more while 75% as of today. Innovation leads to having thepower to establish higher price points, and brand plans to continue to elevate pricingand bring in new products at higher prices.nWarehouse automation in Atlanta: The group was faced with delays in shipmentsand inventory shortages in April/May, and they continue to see delays in Q3. Thebrand has successfully migrated some orders to their West Coast warehouse totackle this. They highlighted that although this adds to shipping times, they havemore inventory flowing into the warehouse, and have managed to support just closea record-breaking month for the brand. They expect some more modest shippingdelays continuing in Q3, albeit sales trends have now re-accelerated from early 2Q.nWholesale: Management mentioned they are happy with the order book for 2025and partners have shared positive feedback. Apparel is more weighted to D2C vs.footwear and contributes to c.25% mix in their own retail doors. They are on theway to having c.10% apparel mix in the company with a more developed supplychain by next year as they work on shortening lead times. ON remains mindful inexpansion of wholesale partners as focus remains on innovation and it will notconsider lowering price points to be successful in certain channels. Managementbelieves it is able to reach younger, female customers by expanding through JD &Footlocker and the brand resonates well at Dick’s too. Distribution via Zalando hasbeen positive (on a 3P basis to retain inventory control) as it helps them accesscommunities hard to tap in DACH.nDTC: ON has seen higher engagement and apparel sales through the newlylaunched app, which has also helped grow its membership base. It has also helpedcustomers to shop across channels for better brand affinity. They believe customersappreciate when they can see the full depth of the offering in flagship stores and itis also helpful for the apparel offering. Flagship stores also act as a marketingwindow for the wholesale channel, and the company quoted the experience withlaunch on Regent Street, London which led to wholesale doors nearbydoubling/tripling their sales. The DTC channel has more room for growth in themarkets with no advanced distribution systems like Central & South America, S.East Asia and Middle East.5 September 20246Goldman SachsGlobal Retail
  7. nChina/APAC: ON currently sees potential for significant growth opportunities in theregion and is confident of getting to c.10% of sales from China. They see a strongunderlying demand that fits into their brand and customer base. They highlightedbeing execution-focused with no compromise on picking the correct stores forexpansion. They currently own operate c.50% stores in China and 99% of the teamis local.nInput cost: Management does not expect any changes in the competitivelandscape, and expect to deliver 60%+ gross margins driven by economies of scalein the longer term.Our 12-month DCF-derived price target is $50, implying a c.27x 2026E EV/EBITDA. Weare Buy rated.Key Risks: 1) A lack of new innovations would hinder ON Holding’s ability to maintain itspremium positioning; 2) With the majority of production based in Vietnam, ON faces awide range of supply chain risks; 3) Fluctuations in foreign currency exchange ratescould harm net sales or operational costs; 4) If consumer tastes in China shift towardslocal brands, growth prospects for ON may be significantly diminished; and 5) Aslower-than-expected shift in the sales mix towards DTC could see contribution margindownside.Key Takeaways on Skechers USA Inc. (Not Covered, authored by BrookeRoach)Panelists: We hosted John Vandemore, Chief Financial Officer, from Skechers USA, Inc.at the 31st Annual Global Retailing Conference.Bottom Line: Management spoke to continued growth and market share opportunityglobally, fueled by innovation and value. On recent trends, the company spoke to aback-to-school season which started weaker but built throughout the quarter. Thecompany noted continued positive indicators of strength in North America wholesale.nConsumer engagement and trends: Management noted continued market sharegain opportunities as they offer consumers style, comfort, and quality at anaffordable price. On recent trends, the company spoke to no meaningful change inspending patterns, with consumers willing to trade up in the SKX assortment to getmore technology in their footwear.nNorth America wholesale: The company noted seeing positive indicators ofstrength within the domestic wholesale channel, particularly with both wholesalepartners who have been quicker to embrace SKX’s newer comfort technologies andthose who have only more recently engaged with them. Within this, managementhighlighted sell-in versus sell-through trends have started to recouple.nInternational: SKX continues to see material long-term growth opportunitiesabroad, most notably in China and India, but also in SE Asia, Europe and otherinternational markets. However, near-term the company continues to navigate amore challenging macro backdrop in China, a choppy India regulatory environment,and distribution headwinds from Red Sea disruption in Europe.5 September 20247Goldman SachsGlobal Retail
  8. nMargins: The company expects Y/Y gross margins to remain stable in 2H followingseveral years of healthy gains, and called out potential mix impacts offset bybenefits from higher ASPs as SKX brings more technologies to the market. Thecompany noted freight increases are beginning to abate, and pressures are unlikelyto be enduring. On promotions, management anticipates a fairly stable Y/Ypromotional environment during the Holiday selling period.nCategory expansion: Management highlighted recent expansions into technicalperformance product, including football/soccer and basketball, are still in earlystages of growth. Within this, the company has increased marketing spend,particularly in athlete ambassadors, in order to drive performance credibility.Longer-term, SKX plans to scale these categories into opening and mid-tier pricepoints once it establishes the performance nature of its more premium productlineup with consumers.nInventory: Management expects inventory to be balanced by year-end. Key Takeaways on Urban Outfitters, Inc. (Coverage Suspended, authoredby Brooke Roach)Panelists: We hosted Frank Conforti, Co-President & Chief Operating Officer, andMelanie Marein-Efron, Chief Financial Officer, from Urban Outfitters, Inc. at the 31stAnnual Global Retailing Conference.Bottom Line: URBN provided a constructive update on recent trends, noting they feelbetter about the environment and expect more limited promotional pressure inAnthropologie / FP relative to their expectations a few weeks ago. The companycontinues to see strength at Anthropologie and FP, and noted opportunities for grossmargin improvement for URBN driven by the Urban Outfitters brand as a result of tighterinventory buys Y/Y. nConstructive tone on the industry: Management struck an incrementally positivetone on the operating environment, noting they’ve seen improvement in thebackdrop and have experienced more limited promotional depth over the last fewweeks. As a result, the company expects deleverage to be at the low end of theirprevious range.nValue/promotions: URBN discussed how their consumer views value, emphasizingfashion and brands in their selection vs. purely the lowest price products. Onpromotions, the company noted plans for similar levels of holiday promotionsplanned at Anthropologie and Free People and lower levels of promos for the UrbanOutfitters brand, with confidence stemming from the growth in the company’scustomer base overall. nAnthropologie: Management highlighted strong performance at their Anthropologiebrand, attributing the strength to consistent execution from the brand team. Thecompany also discussed incremental growth opportunities, particularly withincategory expansion (activewear / vacation / intimates). Here, management notedthey haven’t seen cannibalization as they’ve introduced these new categories. URBNhighlighted that consistent receptivity to product offerings has driven full-price sales5 September 20248Goldman SachsGlobal Retail
  9. above plan, and expects profitability going forward to be driven mainly by leverageon strong top line performance. nFree People Movement: The company highlighted performance at FP Movementhas been driven by strong product offerings, with the products combining bothperformance and fashion. Management also noted incremental distribution wins,with the brand adding new wholesale partners and deepening penetration withcurrent retailers. Further, URBN highlighted productivity at new FP Movementstores has performed above plan, giving them confidence in incremental storeexpansion. Net, the company noted confidence in the reaching $1bn in sales. nUrban Outfitters: Management discussed strategies they have in place to drive areturn to growth at the Urban Outfitters brand, including returning to morenormalized level of opening price points, investing in better product, localizingmarketing and store selections, and selectively editing their store fleet. Outside ofthe US, the company highlighted strength in Europe as the experienced brand teamcontinues to execute in a still-challenged operating environment. On margins, thecompany expects tailwinds in 4Q from fewer promotions Y/Y driven by better depthin buying.Key Takeaways on VF Corp. (Not Rated, covered by Brooke Roach)Panelists: We hosted Bracken Darrell, President & Chief Executive Officer, from VFCorp. at the 31st Annual Global Retailing Conference.Bottom Line: Management spoke about the fast pace of change expected in year twoof the company’s Reinvent transformation plan, with investments in brands being madeto fuel momentum and additional opportunity for cost efficiencies to protect FCF.nReinvent plan: Management spoke to the progress made against their Reinventtransformation plan, including changes made to the organizational and leadershipstructure of the company, cost savings initiatives, and debt paydown. On costsavings, the company noted they are on track to deliver $300mn in cost savings bythe end of this FY, and they continue to see opportunities across the business forfurther savings and efficiencies, with opportunity across both gross margin andSG&A. Meanwhile, the company is also pulling forward investments in brands andinnovation to fuel momentum.nNear-term trends: Management highlighted plans for sequential improvement inrevenue trends and gross margins, but expects 2-3% growth Y/Y in SG&A in F2Qex-Supreme, driving a higher rate of deleverage vs. F1Q as a result of pullingforward reinvestments in growth. Note, this detail is provided in the company’s 8-Kfiled this morning.nDebt: As it relates to debt, management reiterated their commitment to beinginvestment grade and continuing to pay down debt. On the portfolio review process,VFC highlighted that brand / portfolio management is never done, but that thecompany does not want to sell assets at a fire-sale. On free cash flow, the companydid note opportunity for about a 15/20 day reduction in inventory levels.nVans: The company noted that the Classics business (which represents a little more5 September 20249Goldman SachsGlobal Retail
  10. than 50% of the business today) saw some improvement in the rate of decline on aquarter over quarter basis in F1Q. Importantly, the company is also moving quicklyon re-authenticating marketing (introducing skateboarding into the campaigns) andalso scaling newly launched products such as the Knu Skool. The company continuesto expect an inflection to growth but is not committing to a timeline for thatinflection. VFC also plans to close unprofitable Vans stores.nTNF: For TNF, the company spoke to DTC strength across all geographies withopportunity for growth ahead. On wholesale, management identified executionchallenges and customer consistency as opportunities. On innovation, the companysees opportunity in materials-focused product enhancements (examples includefuturelight). By region, management expressed confidence in the growth outlook inChina.nCurrent trends: VFC noted it believes it can improve trends on an idiosyncraticbasis, noting opportunities to perform in a wide range of macro outcomes. That said,the company cited somewhat lower traffic in recent quarters in its geographies andnoted a conservative tone on wholesale orderbooks.We are Not Rated on VFC. Home FurnishingsKey Takeaways on Williams-Sonoma Inc. (Neutral, covered by KateMcShane)Panelists: We hosted Jeff Howie, Executive Vice President and Chief Financial Officer,and Jeremy Brooks, Chief Accounting Officer and Head of Investor Relations, fromWilliams-Sonoma at the 31st Annual Global Retail Conference.Bottom Line: Despite the difficult macro backdrop, WSM expects to be well-positionedfor growth as the current downturn subsides, while noting ongoing strength in itsnon-furniture business (i.e., easy updates) and B2B. Additional details inside the report.nConsumer trends: The average household income of a WSM customer is $140K,with 80% of customers at an income level above the US national average of $75K.As a result, per management, their customers are less responsive to certain macroindicators and more to the wealth effect of the stock market. WSM’s furniturebusiness (~50% of assortment) has been soft, while the non-furniture business (i.e.,easy updates) has performed well.nOpportunities for growth: WSM believes there was likely a pull-forward of demandfor home furnishings, but this will likely burn off by 2024, and as the currentdownturn subsides, the company feels it is well-positioned. Despite the challengingmacro, WSM plans to go after whitespace, with two examples being the dormbusiness (sizable opportunity after BBBY went out of business) and Rejuvenation,one of WSM’s emerging brands, which offers a more upscale product (e.g., lighting,hardware) and has been delivering +DD comps for the past couple of years.5 September 202410Goldman SachsGlobal Retail
  11. nOperating margin expansion: Pre-pandemic, WSM’s operating margins were in the9-10% range, and now in 2024, WSM is guiding to margins of 17.4-17.8%. Permanagement, factors contributing to structurally higher margins include highere-commerce penetration (pre-pandemic at 56%, vs. 66% today), the company’sretail optimization initiative, a focus on full-price selling, supply chain efficiencies,and advertising costs.nB2B initiative: WSM’s B2B business does about $1bn in sales today, with the tradebusiness (interior design, small geographies) comprising ~65% and growing 7% in2Q. The company expects long term growth to come from the contract side(medium and large size businesses), calling out a $80bn TAM and 21% growth in2Q. WSM believes it can grow B2B from $1bn to $2bn in the next 3-5 years.nBack-to-school and holiday: WSM was pleased with back-to-school, with thehighlight being the dorm business. Halloween has gone well so far, with thecompany launching it earlier (in July) as customers were searching for it on theirwebsite. Of note, customers were also searching for Christmas in August, and WSMlaunched it early as well. For FY24, WSM is guiding to comps in the -5.5% to -3.0%range, with the midpoint of the guide implying 1H trends continue, while the highend may include a better-than-expected holiday season, and the low end reflects agreater negative impact from the macro environment in 2H24.We are Neutral rated on WSM with a 12-month price target of $141, based on ourrisk-reward framework with relative P/E multiples of 70%/80%/90%.Upside risks: the higher than historical level of demand that the home furnishingscategory saw during the pandemic could return if the housing market strengthens,especially as hybrid work culture remains more prominent; the company continues tomaintain the majority of the meaningful gross margin expansion it underwent in2020/21 and believes this is a structural change with a long-term operating margin in themid to high teens, which could drive upside risk to our numbers; there are opportunitiesfor market share gains given industry fragmentation and continued pressure in thedepartment store channel, along with persistent retail pressures leading to bankruptcies(e.g., Pier 1)Downside risks: inconsistent demand trends could continue to weigh on the comp,noting the share of wallet/pull-forward impact for the furniture category; margins couldbe pressured once WSM is no longer benefiting from freight tailwinds in 2H24, or apromotional environment could weigh on margins; WSM is trading above its historicalaverage at 16.1x NTM PE, vs. its 3-year/5-year average of 11.9x/13.5xHome ImprovementKey Takeaways on Floor & Decor Holdings (Neutral, covered by KateMcShane)Panelists: We hosted Tom Taylor (CEO), Trevor Lang (President), Bryan Langley (EVP &CFO), from Floor and Decor at the 31st Annual Global Retail Conference.5 September 202411Goldman SachsGlobal Retail
  12. Bottom Line: FND’s sales remain pressured as a result of weak housing turnover. Thecompany is being more strategic with where they are opening stores, and managementbelieves their cost structure sets them up for earnings power in FY25 and beyond.nHousing market: The company believes that a big driver of their business today isexisting home sales, and when existing home sales improve they should see ameaningful lift to their business. Management believes mortgage rates in the~5-5.9% range will be beneficial for existing home sales, however, housingaffordability is still part of the equation. Additionally, FND believes there will be a 1-4month lag once rates come down for when they should start to see benefits. Ifexisting home sales and hard surfacing improves then the company believes theywill grow y/y.nUnit growth: FND has been aggressively opening stores throughout the downturn,opening ~100 store in the past 3 years. Management stated that they are going togrow within their existing capital structure, ranking stores that they believe will havequicker success. The majority of these stores are in existing markets, as new andsmaller markets are taking a longer time to ramp. The company called out theirability to open stores as they have a robust pipeline and strong real estate andconstruction teams.nCost structure: Management stated that if top line remains muted, the companyhas levers that they can pull as 45% of their cost is variable. Currently, a quarter oftheir stores are on minimum hours, so they have the ability to flex hours to mirrortransactions. Additionally, the company has the ability to pull back on advertising.FND believes that their nimble structure sets them up for earnings power in FY25and beyond.nTariffs: Currently everything the company sources from China has a 25% tariff. FNDhas continued to lower and diversify their exposure to China (currently mid-20%penetration). Management stated that if additional tariffs go into place, they will berational about passing on cost increases to consumers.We are Neutral-rated on FND. Our 12-month price target is $82 based on ourdownside/base/upside case relative P/E multiples of 130%/135%/140%.Upside risks include the potential that housing turnover could recover faster thanexpected; FND could gain market share, offsetting a portion of the sales pressures dueto the expected decline in industry-wide demand; and the potential for management toeffectively manage costs allowing for EPS to be better than anticipated.Downside risks include an extended slowdown in demand; the possibility that FND’sefforts to increase Pro penetration are less effective than anticipated, weighing on salesgrowth; execution risk and/or unexpected delays could weigh on store growth; and therisk that consumer preferences shift to favor carpeting over hard surface flooring.5 September 202412Goldman SachsGlobal Retail
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