Wedbush Equity Research

August 10, 2018 The Wedbush Week Ahead

Week of August 13, 2018

Analysts Jesse Bigelow, Director of Research 212-259-6581 Weekly Economic Calendar [email protected] as

Monday – No Notable Events Tuesday – NFIB Small Biz Optimism Index, Import/Export Prices, Redbook

Wednesday – MBA Mortgage Apps, Retail Sales, Empire State Mfg Survey, Productivity and Costs, Industrial Production, Atlanta Fed, Biz Inventories, Housing Mkt Index, Treasury Intl Capital

Thursday – Housing Starts, Jobless Claims, Philadelphia Fed Numbers

Friday – Consumer Sentiment, E-Commerce Retail Sales, Leading Indicators

as Events in focus for next week as

Ticker Date Action Item Read AAP Tuesday Comp/EPS Positive JWN Thursday Gross Margin Positive DDS Expected Next Week Gross Margin/EPS Positive ... Source: Wedbush Securities as Consumer as Within consumer, the focus remains on discretionary vs staples, as the XLY discretionary ETF has been outperforming the XLP staples ETF on a month-to-date basis. Risk-on sentiment within the broader markets continues to drive upside in discretionary shares with the S&P 500 within reach of all-time highs. Retail earnings will be the primary driver of price action in the week ahead.

Consumer Data Analytics: JWN is set to report on Thursday, where we see upside into Q2 after Nordstrom’s recent investor day, which tapered high Street expectation. Intelligence from our Wedbush Big Data product, our proprietary eCommerce model, yields a positive data signal and forecasts upside to gross margin.

Although unconfirmed by management, we expect OP-rated DDS and to also report next week. We are positive going into the quarter, with intelligence from our Wedbush Big Data product forecasting large upside to gross margin. It is our view that the combination of a beat on gross margin in Q2, coupled with heavy short interest will result in strong upside to the stock price from its current discount.

Wedbush Securities does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Please see pages 7–10 of this report for analyst certification and important disclosure information. www.wedbush.com Page 1 Footwear & Apparel: Join Wedbush at our 2018 Footwear & Apparel Summit on Thursday, August 16th in New York City for intimate 1x1 meetings with management teams from Asics, Deckers (DECK), Nike (NKE), Steve Madden (SHOO), SportsOneSource, and Wolverine World Wide (WWW). To sign up for the conference, click here. Hardlines: HD reports on Tuesday before market open and we see risk as balanced. While most home improvement retail sales leading indicators appear favorable for the quarter itself, and the companies should benefit from pent-up demand in the late-breaking spring, we see macro risks building. The biggest inflection in Q2 category sales is in major appliances, with wholesale shipments declining -5% y/y in 2Q vs. a +5% increase in Q1. All in, we are comfortable with our HD comp estimate of +7.0%, about in line with buyside expectations and near consensus +6.6% due to strong execution and pent-up demand capture. Additionally, AAP is reporting Tuesday before market open. We are favorable into the print, and while buyside comp expectations have risen in recent weeks to +0.5% to +1.0%, we see strong potential for AAP to at least meet these expectations as the company benefits from stable field operations, the completed roll out of cross-banner availability in February, inflation and favorable weather. Looking forward, we believe Q3 is off to a solid start and we expect positive comps for 2H, with more upside than downside risk from these same drivers and an incremental benefit from transferred sales as a result of store closures. While an increase to 2018 comp and margin guidance is not likely required to support shares, it could serve as a positive catalyst along. Homebuilders and Building Products: The ITB Home Construction ETF continues to churn near the lower end of YTD range. In the week ahead, the focus will be macro data points with Housing Market Index on Wednesday and Housing Starts on Thursday. asd FIG asd We anticipate a slow August week for bank stocks with the main highlight the release of Fed H.8 data after the close Friday. C&I loan growth has moderated over the last two weeks, according to the H.8 data. While we are not raising a red flag, it is worth highlighting given a noticeable positive change in tone from management teams during 2Q earnings conference calls related to loan growth. In addition, period-end loan balances exceeded average balances by the highest amount in several quarters. Separately, short term rates including 1-month and 3-month LIBOR are little changed QTD from June 30th, down 2 bp and up 1 bp, respectively, which could limit anticipated margin expansion for the banks if these rates do not move up as the quarter progresses. While we are modeling for a moderation in NIM expansion in coming quarters, we would be inclined to adjust our NIM forecasts lower if short rates stay at current levels, as the majority of floating rate loans held by banks price off of these LIBOR rates. as Healthcare as We are not seeing the normal seasonal weakness this year, as strength within HC continues with 2Q earnings releases meeting investor expectations. This week has been tilted towards more SMID- cap earnings, with much of the large-cap prints now behind us. Pharma has been impressive as the drug pricing narrative looks to be exhausted. Managed care strength has been remarkable with WCG closing well above the secondary offering price and CI not noticeably affected by Icahn’s involvement. Small and mid-cap biotech volatility remains heightened, as pipeline updates come with 2Q earnings releases. Investors have not been kind to those who are pushing dates out. Flows on the desk have been slightly better to buy, with money coming into SMID-cap biotech (later stage assets) from the Long Only community and dedicated investors de-risking and adjusting portfolios.

We saw some slight shifts in the hemophilia A gene therapy landscape, as preliminary Phase 1/2 data for SGMO’s hemophilia A gene therapy (SB-525) provided initial clinical proof-of-concept for the company’s ZFN platform. We await a more detailed presentation at ASH in December to see

www.wedbush.com Page 2 how its profile may stack up against competitors. In our view, BMRN’s hemA candidate (BMN-270) is still the leader in this space due to stellar efficacy and developmental maturity, especially in light of recent underwhelming results from ONCE.

In the coming week we host our annual 2-day conference in NY Tuesday and Wednesday, with over 75 companies presenting ( Click here to register). For many recent new issues, including AvroBio ( AVRO ), Kiniksa ( KNSA), Magenta ( MGTA ), Scholar Rock (SRRK) and Unum (UMRX), this will be their first investor conference as public companies. We also expect the conference to be highly impactful for some of the less followed names under coverage like Fennec (FENC) and Merus (MRUS). Mersana (MRSN) will also be presenting and holding its second quarter earnings call on Aug 15 where we look for updates regarding the partial hold on XMT-1522. as TMT as Technology momentum continued this week with strong earnings triggering yet another furious rally across higher beta, growth pocket of the sector (SMID-Cap Internets, Cloud/SaaS, Disruptive Tech – i.e. CVNA, ROKU ). Semis lagged on renewed peak cyclical concerns / negative sell-side commentary, which exaggerated some of the moves seen across the Software Complex. Large cap leadership is showing no signs of fading from the likes of AAPL, AMZN, MSFT and GOOGL. Videogame publisher sentiment has taken somewhat of a hit but there remains a long bias and we have seen dedicated tech funds adding on recent pullbacks, while Fortnite impacting engagement trends remain a concern from the generalist community. Within FinTech, WP (Wedbush Best Ideas List) broke out post a solid print showing accelerating growth drawing the attention of momentum investors. Shorts remain concentrated across legacy tech, hardware and memory. We saw a media short squeeze, driven by better than expected numbers in general, although DIS disappointed. With EPS season winding down it leaves little to get excited about in coming weeks, thus the path of least resistance remains higher for the sector.

www.wedbush.com Page 3 UPCOMING EVENTS CONFERENCES Date Event City August 14-15, 2018 2018 Wedbush PacGrow Healthcare Conference New York 16-Aug-18 2018 Footwear & Apparel Summit New York 14-Nov-18 2018 Midwest Bank Forum Chicago

CONFERENCE CALLS Date Event Time 16-Aug-18 Video Game Sales Recap | ATVI, EA, GME, NTDOY, TTWO, UBI 5:30 ET Wedbush Host: Michael Pachter, Digital Media Yield Curve's Recession Predictability | CMA, RF, CFG, NYCB, SIVB, 5-Sep-18 10:00 ET EWBC, SBNY, ZION Advisor Call with Jim O'Sullivan, Economist at High Frequency Economics Wedbush Hosts: Peter Winter, Regional Banks and David Chiaverini, Mid-Cap Banks

EVENTS Date Event Time 12-Sep-18 Rapid Growth of Esports | ATVI, EA, NTDOY, TTWO, UBI New York Advisor lunch with Tobias Sherman, CEO and Co-Founder of Foundry IV Wedbush Host: Michael Pachter, Digital Media 13-Sep-18 Rapid Growth of Esports | ATVI, EA, NTDOY, TTWO, UBI Boston Advisor lunch with Tobias Sherman, CEO and Co-Founder of Foundry IV Wedbush Host: Michael Pachter, Digital Media

NON-DEAL ROADSHOWS Date Event City 13-Aug-18 Pacira Pharmaceuticals, Inc. Management Dinner | PCRX New York David Stack, CEO, Charles Reinhart, CFO, and Susan Mesco, IR Wedbush Host: Liana Moussatos, Emerging Pharmaceuticals 14-Aug-18 Kura Oncology, Inc. Management Dinner | KURA New York Troy Wilson, CEO and Pete De Spain, VP of IR & Corporate Communication Wedbush Host: Robert Driscoll, Biotechnology August 14-15, 2018 Electronic Arts Inc. | EA New York Blake Jorgensen, CFO and Erin Rheaume, IR Wedbush Host: Michael Pachter, Digital Media 15-Aug-18 Denny's Corporation | DENN New York John Miller, CEO, Mark Wolfinger, CFO, Robert Verostek, SVP of Finance, and Curt Nichols, Sr. Director of Financial Planning and IR Wedbush Host: Nick Setyan, Restaurants

www.wedbush.com Page 4 15-Aug-18 Vivet Therapeutics Management Dinner | Private New York Jean-Phillippe Combal, CEO Wedbush Host: David Nierengarten, Biotechnology 16-Aug-18 Sierra Oncology, Inc. | SRRA Boston Nick Glover, CEO and Jason Smith, IR Wedbush Host: Robert Driscoll, Biotechnology Milwaukee/ August 20-21, 2018 Beacon Roofing Supply, Inc. | BECN Chicago Joe Nowicki, CFO and Brent Rakers, IR Wedbush Host: Jay McCanless, Homebuilders 21-Aug-18 Huntington Bancshares Incorporated HQ Visit | HBAN Ohio Stephen Steinour, CEO, Dan Neumeyer, CCO, Andy Harmenin, Consumer & Business Banking Dir., and Rick Remiker, Commercial Banking Dir. Wedbush Host: Peter Winter, Regional Banks 28-Aug-18 Fifth Third Bancorp | FITB Ohio Greg Carmichael, CEO, Tayfun Tuzun, CFO, and Sameer Gokhale, IR Wedbush Host: Peter Winter, Regional Banks 29-Aug-18 Virtusa Corporation | VRTU New York Ranjan Kalia, CFO Wedbush Host: Moshe Katri, Payments/IT Services 30-Aug-18 Valley National Bancorp Management Lunch | VLY New York Ira Robbins, CEO and Rick Kraemer, IR Wedbush Host: David Chiaverini, Mid-Cap Banks Tampa / September 4-5, 2018 Ansys, Inc. | ANSS Atlanta Lee Detwiler, VP of Finance and Annette Arribas, Global IRO Wedbush Host: Steve Koenig, Enterprise Software London / September 4-5, 2018 Glu Mobile, Inc. | GLUU Paris Nick Earl, CEO Wedbush Host: Michael Pachter, Digital Media September 10-11, 2018 Builders FirstSource, Inc. | BLDR San Fran / LA

Peter Jackson, CFO Wedbush Host: Jay McCanless, Homebuilders 11-Sep-18 Cathay Bancorp | CATY New York Heng Chen, CFO Wedbush Host: David Chiaverini, Mid-Cap Banks 11-Sep-18 PegaSystems, Inc. | PEGA Chicago Ken Stillwell, CFO Wedbush Host: Steve Koenig, Enterprise Software

www.wedbush.com Page 5 14-Sep-18 Meritage Homes Corp. | MTH Dallas Steve Hilton, CEO Wedbush Host: Jay McCanless, Homebuilders 17-Sep-18 Total System Services, Inc. Headquarter Visit | TSS Austin Kelly Knutson, CEO, Consumer Solutions Wedbush Host: Moshe Katri, Payments/IT Services 24-Sep-18 XOMA Corporation | XOMA San Francisco

Jim Neal, CEO and Tom Burns, CFO Wedbush Host: Liana Moussatos, Emerging Pharmaceuticals

ANALYST MARKETING Date Event City 8-Aug-18 Steve Koenig, Enterprise Software Boston Coverage: CRM, WDAY, ULTI, AZPN, SPLK, DATA, ADSK, ANSS, PTC, FEYE, PFPT, ORCL, PEGA, PRGS, NEWR 10-Aug-18 David Nierengarten, Biotechnology Chicago

Coverage: ARDX, IRWD, ARGX, BPMC, CMTA, ECYT, EPZM, FATE, FENC, GTHX, KPTI, MGNX, MRUS, STML, SYBX, SYRS, TSRO, UMRX, XNCR, ANAB, AGTC, AVRO, BLUE, BOLD, KNSA, MGTA, NITE, NTLA, ONCE, PRTA, RARE, SRRK, VYGR, MYOK, NVCR August 28-30, 2018 Michael Pachter, Digital Media New York Coverage: ATVI, EA, GME, NTDOY, TTWO, UBI, *FIT, *GPRO, *HEAR, BBY, AMC, CNK, IMAX, RGC, *NCMI, AMZN, *GLUU, NFLX, P, ZNGA, FB, TWTR, SNAP

To register for an event or for more information, please contact your Wedbush sales person or Wedbush Equity Corporate Access at [email protected] or 213-688-4455.

www.wedbush.com Page 6 Wedbush Best Ideas List Past performance is not an indicator of future results. Actual performance may differ from the performance information contained herein. The prices and performance information are based on data from statistical services, reports, or other sources which WS believes are reliable, but its accuracy cannot be guaranteed. Results presented in this report neither reflect inclusion of dividends nor deductions for commissions, costs, fees, or expenses. Such commissions, costs, fees, or expenses will reduce the actual returns. The volatility of the S&P 500 and/or any other benchmark index presented is materially different from that of the model portfolio and is used to illustrate the general market condition on the results portrayed. Benchmark Indices are unmanaged and cannot be invested in directly.

Analyst Certification I, Jesse Bigelow, certifies that the views expressed in this report accurately reflect my personal opinion and that I have not and will not, directly or indirectly, receive compensation or other payments in connection with my specific recommendations or views contained in this report.

Mentioned Companies Company Rating Price Target Advance Auto Parts OUTPERFORM $147.79 $160.00 Amazon.com OUTPERFORM $1,898.52 $2,100.00 AVROBIO, Inc. OUTPERFORM $38.06 $43.00 BioMarin Pharmaceuticals OUTPERFORM $102.03 $120.00 Carvana Co. NEUTRAL $51.11 $40.00 Dillard's, Inc. OUTPERFORM $88.17 $95.00 Deckers Outdoor Corp NEUTRAL $121.28 $106.00 Fennec Pharma OUTPERFORM $9.90 $17.00 Alphabet $1,264.46 Home Depot NEUTRAL $198.08 $190.00 Nordstrom, Inc. NEUTRAL $52.55 $55.00 Kiniksa Pharmaceuticals OUTPERFORM $13.99 $31.00 Magenta Therapeutics OUTPERFORM $13.39 $22.00 Mersana Therapeutics OUTPERFORM $12.60 $16.00 Merus N.V. OUTPERFORM €19.22 €34.00 Nike, Inc OUTPERFORM $81.26 $85.00 Spark Therapeutics UNDERPERFORM $57.88 $40.00 Sangamo Therapeutics NEUTRAL $15.30 $10.00 Steven Madden, Ltd. NEUTRAL $56.45 $55.00 Scholar Rock OUTPERFORM $14.18 $25.00 Unum Therapeutics OUTPERFORM $15.03 $18.00 Worldpay, Inc. OUTPERFORM $90.60 $100.00 Wolverine World Wide OUTPERFORM $37.68 $41.00

Investment Rating System: OUTPERFORM: Expect the total return of the stock to outperform relative to the median total return of the analyst's (or the analyst's team) coverage universe over the next 6-12 months. NEUTRAL: Expect the total return of the stock to perform in-line with the median total return of the analyst's (or the analyst's team) coverage universe over the next 6-12 months. UNDERPERFORM: Expect the total return of the stock to underperform relative to the median total return of the analyst's (or the analyst's team) coverage universe of the next 6-12 months.

www.wedbush.com Page 7 The Investment Ratings are based on the expected performance of a stock (based on anticipated total return to price target) relative to the other stocks in the analyst's coverage universe (or the analyst's team coverage).*

Rating distribution Investment Banking Relationships (as of August 10, 2018) (as of August 10, 2018) OUTPERFORM: 57.65% OUTPERFORM: 12.99% NEUTRAL: 40.72% NEUTRAL: 0.80% UNDERPERFORM: 1.63% UNDERPERFORM: 0.00%

The Distribution of Ratings is required by FINRA rules; however, WS' stock ratings of Outperform, Neutral, and Underperform most closely conform to Buy, Hold, and Sell, respectively. Please note, however, the definitions are not the same as WS' stock ratings are on a relative basis. The analysts responsible for preparing research reports do not receive compensation based on specific investment banking activity. The analysts receive compensation that is based upon various factors including WS' total revenues, a portion of which are generated by WS' investment banking activities.

Company Specific Disclosures 1. WS makes a market in the securities of Advance Auto Parts, Amazon.com, AVROBIO, Inc., BioMarin Pharmaceuticals, Carvana Co., Deckers Outdoor Corp, Fennec Pharma, Alphabet, Home Depot, Kiniksa Pharmaceuticals, Magenta Therapeutics, Mersana Therapeutics, Merus N.V., Nike, Inc, Spark Therapeutics, Sangamo Therapeutics, Steven Madden, Ltd., Scholar Rock, Unum Therapeutics, Worldpay, Inc. and Wolverine World Wide. 2. WS managed a public offering of securities for Fennec Pharma within the last 12 months. 3. WS co-managed a public offering of securities for AVROBIO, Inc., Carvana Co., Kiniksa Pharmaceuticals, Magenta Therapeutics, Mersana Therapeutics, Scholar Rock and Unum Therapeutics within the last 12 months. 4. WS has received compensation for investment banking services from Kiniksa Pharmaceuticals and Scholar Rock within the last 12 months. 5. WS provided AVROBIO, Inc., Carvana Co., Fennec Pharma, Kiniksa Pharmaceuticals, Magenta Therapeutics, Mersana Therapeutics, Scholar Rock and Unum Therapeutics with investment banking services within the last 12 months. 7. WS expects to receive compensation for investment banking services from AVROBIO, Inc., Carvana Co., Kiniksa Pharmaceuticals, Magenta Therapeutics, Mersana Therapeutics, Scholar Rock and Unum Therapeutics within the next 3 months.

Price Charts Wedbush disclosure price charts are updated within the first fifteen days of each new calendar quarter per FINRA regulations. Price charts for companies intiated upon in the current quarter, and rating and target price changes occurring in the current quarter, will not be displayed until the following quarter. Additional information on recommended securities is available on request. Disclosure information regarding historical ratings and price targets is available: http://www.wedbush.com/ResearchDisclosure/ DisclosureQ118.pdf *WS changed its rating system from (Strong Buy/ Buy/ Hold/ Sell) to (Outperform/ Neutral/ Underperform) on July 14, 2009. Please access the attached hyperlink for WS' Coverage Universe: http://www.wedbush.com/services/cmg/equities-division/research/ equity-research Applicable disclosure information is also available upon request by contacting Leslie Lippai in the Research Department at (212) 833-1375, by email to [email protected], or the Business Conduct Department (213) 688-8090. You may also submit a written request to the following: Business Conduct Department, 1000 Wilshire Blvd., Los Angeles, CA 90017.

www.wedbush.com Page 8 OTHER DISCLOSURES The information herein is based on sources that we consider reliable, but its accuracy is not guaranteed. The information contaned herein is not a representation by this corporation, nor is any recommendation made herein based on any privileged information. This information is not intended to be nor should it be relied upon as a complete record or analysis: neither is it an offer nor a solicitation of an offer to sell or buy any security mentioned herein. This firm, Wedbush Securities, its officers, employees, and members of their families, or any one or more of them, and its discretionary and advisory accounts, may have a position in any security discussed herein or in related securities and may make, from time to time, purchases or sales thereof in the open market or otherwise. The information and expressions of opinion contained herein are subject to change without further notice. The herein mentioned securities may be sold to or bought from customers on a principal basis by this firm. Additional information with respect to the information contained herein may be obtained upon request. Wedbush Securities does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Please see pages 3–7 of this report for analyst certification and important disclosure information.

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Equity Research

CONSUMER AND RETAIL HEALTHCARE Consumer Data Analytics Biotechnology Jen Redding (212) 344-2386 [email protected] David Nierengarten, Ph.D.(415) 274-6862 [email protected] Footwear & Apparel Biotechnology Christopher Svezia (212) 938-9922 [email protected] Robert Driscoll (415) 274-6863 [email protected] Hardlines Retail Emerging Pharmaceuticals Seth Basham (212) 938-9954 [email protected] Liana Moussatos, Ph.D. (415) 263-6626 [email protected] Homebuilders/Building Products Jay McCanless (212) 833-1381 [email protected] TMT Leisure Payments/IT Services James Hardiman (212) 833-1362 [email protected] Moshe Katri (212) 938-9947 [email protected] Restaurants Digital Media Nick Setyan (213) 688-4519 [email protected] Michael Pachter (213) 688-4474 [email protected] Digital Media FINANCIAL INSTITUTIONS GROUP Nick McKay (213) 688-4343 [email protected] Mid-Cap Banks Enterprise Software David Chiaverini (212) 938-9934 [email protected] Steve Koenig (415) 274-6801 [email protected] Regional Banks SMID Internet Peter Winter (212) 938-9941 [email protected] Ygal Arounian (212) 938-9929 [email protected] Specialty Finance Henry Coffey (212) 833-1382 [email protected]

RESEARCH MANAGEMENT Jesse Bigelow Strecker Backe Director of Research Associate, Equity Research [email protected] [email protected] (212) 259-6581 (212) 833-1367

HEAD OF EQUITIES Kirsten Fraunces [email protected] (213) 688-4404

CORPORATE ACCESS Anita Minassian Phylicia Kirven VP, Corporate Access VP, Corporate Access [email protected] [email protected] (213) 688-4419 (213) 688-4455

TRADING Consumer/Industrials TMT Tyler Pasley (213) 688-4466 [email protected] Joel Kulina (212) 938-2056 [email protected] Financials/Healthcare Sahak Manualian (213) 688-4533 [email protected]

WEDBUSH OFFICES LOS ANGELES NEW YORK SAN FRANCISCO 1000 Wilshire Boulevard 142 W 57th Street 2 Embarcadero Center, Suite 600 Los Angeles, CA 90017 New York, NY 10019 San Francisco, CA 94111 (213) 688-8000 (212) 938-9920 (415) 273-7300 BOSTON CHICAGO 265 Franklin Street 141 W. Jackson Boulevard, Suite 1710A Boston, MA 02110 Chicago, IL 60604 (617) 832-3700 (312) 786-1930

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