Weekly Issue: Shift in Consumer Spending Continues
KEY POINTS FROM THIS ALERT
- We continue to have a Sell rating in Funko (FNKO) shares, and a short position on the Tematica Options+ Select List. Our buy stop for FNKO shares remains at $10.
- We continue to have a Sell rating on Target (TGT) shares and a short position in them on the Tematica Options+ Select List. We continue to have our buy-stop set at $85.
- We continue to have a Buy rating on the GSV Capital (GSVC) Jun 2018 10.000 calls (GSVC180615C00010000).
- We will continue to hold the Paccar (PCAR) May 2018 70.00 calls (PCAR180518C00070000)ahead of the company’s April 24 earnings report. We are increasing our stop loss to 2.00 from 0.60.
Before we get started with this week’s issue of Tematica Options+, I would suggest you read yesterday’s weekly issue of Tematica Investing. Why? Not because I think the words are so full of wisdom, even though they are, but rather because of the discussion surrounding the March Retail Sales Report, especially the segments that underperformed – Department stores, general merchandise stores and Sporting Goods, hobby, book & music stores.
As I mentioned yesterday, the Sporting Goods, hobby, book & music stores category was hardest hit during 1Q 2018 as those retail sales fell 4% year over year, and we’ve yet to see the impact of the Toys R Us bankruptcy and subsequent liquidation sales. This keeps our short position on Funko (FNKO) shares in place, and next week’s earnings reports from Mattel (MAT) and Hasbro (HAS), two leading toy companies, should shed some light on the challenging 1Q 2018 toy environment and what they expect the Toys R Us impact to be. As I shared recently, I continue to see this playing out the way the Sports Authority bankruptcy and liquidation sales did on Nike (NKE) and Under Armour(UAA).
- We continue to have a Sell rating in Funko (FNKO) shares, and a short position on the Tematica Options+ Select List. Our buy stop for FNKO shares remains at $10.
The outlook for Target gets even more challenging
That same March Retail Sales Report also showed General merchandise retail sales rose 3% year over year during 1Q 2018, lagging behind overall year over year 1Q 2018 retail sales growth of 4.3%. Department stores didn’t fare much better as their sales for the quarter fell 0.6% year over year. By comparison, Costco Wholesale (COST) delivered stellar 1Q 2018 same store comp sales, and COST shares on the Tematica Investing Select List have soared closing last night at more than $196 vs. roughly $185 a year ago. As a reminder, I boosted our target on COST shares yesterday to $210 from $200.
What the above paragraph points out is consumers continue to shift where they spend, and that even before we factor in the 9.7% year over year increase in Nonstore retail sales during 1Q 2018. Yes… that means Amazon (AMZN) and others that are embracing digital shopping. In yesterday’s annual shareholder letter, Amazon CEO Jeff Bezos shared the company has 100 million Amazon Prime members. As Amazon continues to expand its offerings, odds are that means we’ll be seeing more pain for brick & mortar retailers especially since for the 8thyear in a row Amazon was ranked #1 on the American Customer Satisfaction. In fact, this past week it was announced that Bon-Ton Stores (BONT), which operates 260 locations is expected to go out of business with liquidation sales to follow.
Put it all together, and it’s more than a little worrisome when it comes to Target (TGT) growing its sales 3% plus year over year in 1Q 2018, which is exactly what Wall Street expects it to do. Over the last several weeks, we’ve seen EPS forecasts for the quarter start to move lower and in examining those expectations we see that Wall Street expects Targets revenue growth to slow as we move through 2018. Based on what I am seeing, it looks like that slowdown is poised to appear sooner than the herd thinks it will.
- We continue to have a Sell rating on Target (TGT) shares and a short position in them on the Tematica Options+ Select List. We continue to have our buy-stop set at $85.
The expected positives for GSV’s portfolio are starting to emerge
Let’s turn to our call position in GSV Capital, the GSV Capital (GSVC) Jun 2018 10.000 calls (GSVC180615C00010000), which we scaled into last week and have since traded lower. Very frustrating to say the least, but as expected following the IPO of Dropbox (DBX) the underwriters are issuing Buy and Overweight ratings with price targets in the range of $35-$40. This led DBX shares, one of GSV’s larger positions in its investment portfolio, to rebound off its lows last week. We’re also seeing price targets for streaming music service Spotify (SPOT), another large position in GSV’s investment portfolio emerge. Canaccord Genuity started SPOT shares with a Buy rating and a $200 price target (up 29% from last night’s close) while Stifel has a $180 target on the shares.
In the coming weeks, Dropbox and Spotify will report their quarterly results and odds are pretty high they will at least meet expectations and likely beat them. As simple as it may sound, companies tend not to become public if their business is softening. Given our June expiration for our GSV Capital calls, even though the recent disconnect between the DBX and SPOT price targets and GSV shares is maddening, let’s be patient and let this run its course.
- We continue to have a Buy rating on the GSV Capital (GSVC) Jun 2018 10.000 calls (GSVC180615C00010000).
Our Paccar calls keep on trucking
On the positive, our call option position in heavy truck company Paccar, the Paccar (PCAR) May 2018 70.00 calls (PCAR180518C00070000), finished last night up 52% from our April 5 entry. Yesterday’s March Industrial Production Report, which revealed a month over month increase in manufacturing following an upwardly revised figure for February to +1.5%, bodes very well for additional truck orders. As a reminder, heavy truck orders for 1Q 2018 were the highest they have been in over a decade. Ahead of Paccar reporting its 1Q 2018 results on April 24, let’s continue to hold the calls, but boost our stop loss to 2.00 from $0.60, which will lock in a modest profit on the position.
- We will continue to hold the Paccar (PCAR) May 2018 70.00 calls (PCAR180518C00070000)ahead of the company’s April 24 earnings report. We are increasing our stop loss to 2.00 from 0.60.
