Off-Price Retail: 2Q "At Least" In-Line w/ 3Q Opportunity to Own; Fieldwork & Access Takes

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Off-Price Retail: 2Q "At Least" In-Line w/ 3Q Opportunity to Own; Fieldwork & Access Takes

flagged by our industry fieldwork). In addition, June underperformed May/

July by ~350bps on our estimates tied in part to transitory Hispanic customer disruption,

notably in key urban CA markets last year.

(2) . . . w/ Two-Pronged 3Q Upside: Into 3Q, we raise our model to reflect +4.0% same-

store-sales growth (vs. Street +3.4%), equating to a +11% 2-yr stack (= 2Q +11% 2-yr stack

by our model & 1Q’s +17%). Importantly into 3Q, management flagged “gaps” in the

assortment a year ago entering Back to School as a result of the disruption from tariffs

last year (e.g. backpacks, home), with YOY recapture incremental upside relative to

our +4% comp forecast.

• Two opportunities YOY: (1) optimize & make larger bets within the product

assortment entering Back to School (see Figures 1-4 below w/ Backpacks a notable

standout by our work in addition to Y2K Juniors merchandise in Apparel/Home),

and (2) better position labor hours within the store YOY to better service customers

reduce line queues.

(3) Raising Margins w/ Incremental Upside on Merch Margins, Fuel, and IC: On the

bottom-line, we raise our 2Q gross margin to 29.2% (above Street 29.0%) and operating

margin to 13.5% (> Street 13.0%). Importantly, our recent access confirmed merchandise

margin expansion expected to continue into 2Q (vs. 1Q’s +85bps tailwind) representing

recapture of the branded investment on margins from FY24, with our 2-yr stacked

math on core merchandise margins pointing to +30bps of incremental potential upside

vs. our current model reflecting 55bps of expansion (= +$0.04 to 2Q EPS). In addition,

management previously noted on the 5/21 EPS Call “our guidance does reflect the