Last Week in Retail, Part 2

 | Jan 13, 2014 | 1:00 PM EST
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Yesterday, we published the first half of this report in which we focused on the bad news in the retail sector. Here is our summary of the (relatively) good news.

Abercrombie & Fitch

Even some of the good news wasn't all that good. Abercrombie & Fitch (ANF) reported better-than-expected same-store sales Thursday, but better-than-expected still meant declines of 6%; comparable US sales fell 4% and comparable international sales dropped 10%. Expectations were so low that even this mid-single-digit decline prompted the firm to raise its earnings outlook for the year, to $1.55-$1.65 (was $1.40-$1.50). Still, Abercrombie & Fitch couldn't help but mention the intensely, competitive environment, which we think is more informative about the company's operating conditions than its results, which can best be described as less-than-terrible.


Another retail outlier during the week was Costco (COST). On Thursday, the warehouse operator reported decent comparable sales, but this followed weaker-than-expected performance in November. Total company comparable sales growth for the five weeks ended Jan. 5 was 3% or 5%, excluding negative impacts from gasoline price deflation and foreign exchange. Though this matches the pace of same-store sales performance during the 12 weeks ended Nov. 24, 2013, underlying performance in its U.S. and international segments was modestly better during the past five weeks. Still, the release did more to alleviate concerns than reveal accelerated same-store sales expansion at the firm.   


The same could be said about Gap (GPS). Released on Thursday, the retailer's comparable sales growth for December 2013, was flat vs. a 5% increase for December 2012. Gap Global recorded a positive 1% showing, Banana Republic global's performance was flat, while Old Navy's global performance tumbled 2%. This is hardly news worth writing home about, but the retailer did indicate that it was comfortable delivering at the high end of its guidance range of $2.57-$2.65 for fiscal 2013. Where most news from the retail sector has been bad, we're accepting Gap's performance in a positive light.


On Wednesday, Macy's (M) reported decent comparable sales expansion during the months of November and December combined. Comparable sales advanced 3.6% in the November/December period, while together with comparable sales from departments licensed to third parties, the same-store sales performance was even better (4.3%). The commentary was very positive as well, a true outlier in the retail space.

Macy's also provided strong initial guidance for fiscal 2014. The retailer expects comparable sales for the year to increase in the range of 2.5%-3% compared with 2013 levels and achieve earnings per share in the range of $4.40-$4.50. On top of the solid sales data and encouraging 2014 outlook, management announced cost-reduction initiatives to add flexibility to hit its bottom-line targets.

Urban Outfitters

Along with Macy's, Urban Outfitters (URBN) may have been one of the only true positive performances, but management also spoke to an extremely promotional retail environment and its stock price (valuation) already speaks of sales resiliency. The specialty retailer noted on Thursday that comparable retail segment net sales advanced 3% in the two months ended Dec. 31, 2013. Comparable retail segment net sales increased 21% at Free People and 11% at Anthropologie and decreased 6% at its branded Urban Outfitters stores. Its wholesale segment net sales jumped more than 20% over the time period.

Valuentum's Take

The holiday shopping season appears to have been one of the most competitive in a while, and it was exacerbated by the extremely cold December/early January weather across much of the U.S. We don't hold any retailer in the actively-managed portfolios -- and you can probably see why after reading these articles.

We view Macy's and Urban Outfitters' performances as perhaps the only true outperformers in the period and believe that J.C. Penney (JCP) and Sears (SHLD) remain in dire straits (see here and here, respectively). We're monitoring the retail sector very closely, and we expect results will be at the lower end of expectations for the fourth quarter.

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