Goldman Sachs Manufacturing Revolution ETF

Net sales in the third quarter of fiscal 2016 decreased 6.7% to $143.5 million versus $153.9 million last year. Comparable store sales on an owned basis declined 9.5%. Gross profit was $62.9 million and gross margin was 43.8%, down 60 basis points from 44.4% last year, driven mainly by a higher markdown rate. SG&A was $69.9 million, or 48.7% of sales, versus $71.9 million, or 46.7% last year. The net loss was $4.8 million, or $0.25 per diluted share, versus a net loss of $2.8 million, or $0.14 per diluted share a year ago. For the first nine months, net sales were down 5.7% to $417.8 million, comps fell 8.5%, and the net loss widened to $12.5 million, or $0.64 per diluted share. Cash and cash equivalents were $8.4 million, inventory was $153.6 million and down 7% year over year, and excess availability on the revolving credit line was $36.1 million. For Q4, management guided net sales to $197 million to $203 million, comps down 5.5% to 8.5%, gross margin comparable to last year, SG&A at or below last year, and diluted EPS of $0.01 to $0.06.

CEO Andrew Hall said the quarter was disappointing because the business continued to underperform long-term expectations, even though comps improved 160 basis points from Q2 and landed within guidance. He emphasized better inventory positioning, expense savings from the comprehensive review, and improving demand once colder weather arrived in the back half of November. Hall also highlighted stronger categories like men’s gifts, home, kids, and electronics, while noting ongoing weakness in junior tops, denim, and some cold-weather classifications.

CFO James Brown detailed the quarter’s financial pressure: sales fell to $143.5 million, gross margin slipped to 43.8%, and SG&A rose to 48.7% of sales despite a $2 million dollar reduction. He attributed the margin pressure mainly to markdowns used to keep inventory appropriately valued for the holiday season, and noted that inventory ended at $153.6 million, down 7% year over year, with comparable store inventory down 5.2%. Brown also said cash was $8.4 million, excess revolver availability was $36.1 million, and 2016 capital expenditures should be less than last year. He guided Q4 EPS to $0.01 to $0.06 and said SG&A should be at or below last year due to lower store and distribution costs, partly offset by higher eCommerce and depreciation expense.

Analysts focused on whether the stronger Black Friday period implied better gross margin or a more optimistic comp outlook, and management said the flat Q4 margin guide reflects inventory quality and the ability to manage markdowns, not a forecast for a positive quarter-wide comp. Hall said traffic remains a challenge, especially for brick-and-mortar retail, and urged caution because December is still a large part of the quarter. In response to questions about product momentum into 2017, he pointed to improving trends in kids, missy, home decor, career, young men’s, and modern farmhouse, while acknowledging continued work needed in juniors and some other areas.