The Daily Dose: Surprises Can Kill You

 | Feb 21, 2014 | 11:00 AM EST
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I don't enjoy surprises. I always want to know a range of possible outcomes and to be prepared. If I get surprised, it's tantamount to me not doing a correct analytical job.

The market, apparently, is immune to negative surprises right now. Data misses are piling up and yet stocks are going higher, no doubt on the notion that once the ground thaws we will experience a thunderous conclusion to the first quarter. It would appear that the market will not react to bad news of any sort until the February employment report, with weather having improved by the middle of the month (and considering the LEI and recent claims data), a third-consecutive shortfall in nonfarm payrolls should get the market's attention just as Yellen prepares for her initial Q&A session in late March.

Here are three things keeping me awake at night.

  1. Hewlett-Packard's (HPQ) earnings did not support the view on the Street that capital investment is in the minds of corporate America. Zero in on the parts of the company's business that touch large entities, such as enterprise hardware and services.
  2. Wal-Mart (WMT) did not suggest with its letdown of an earnings report and forward guidance that a majority of U.S. consumers are financially improving. In fact, the argument could be made that consumers not leveraged to the stock market are financially worse off in the past six months, causing Wal-Mart to forego margins to drop prices.
  3. Utilities stocks are leading this rally renewal. Don't give me it's a weather thing. It's still a negative sign to see this happening.


Source: Yahoo! Finance


Speaking of that dog Wal-Mart ...

There is no reason whatsoever to invest in Wal-Mart.

Not too sure what wool Wal-Mart was trying to pull over the eyes of the long-term investors holding its dividend-paying stock, but the company certainly brought it's A-game yesterday. A material bump in capex guidance was detailed to accelerate the small store rollout, sticking a kibosh on the rumors of a Family Dollar (FDO) transaction. As I said on Twitter, Wal-Mart believes in protecting its HQ culture by promoting and growing from within and is usually against bringing in outsiders. Moreover, a Family Dollar transaction would be an acknowledgment by Wal-Mart that its prior executives missed the small store opportunity years ago.

Wal-Mart is not one to acknowledge operating missteps. The company went onto express confidence in positive U.S. comps for 1Q 2014 after underperforming its goal consistently in 2013 and beginning the quarter with weather- and economy-impacted negative comps. Hey, at least we know how much Wal-Mart generates from online ($10 billion worldwide). Credit the hip new CEO Doug Mcmillon for the disclosure evolution.

But when cutting through the treacherous comments designed to trip up investors, there were, at the minimum, seven disturbing aspects to the report and overall tone around it.

  • Wal-Mart is accelerating new store openings in the U.S. while failing to  address (and communicate to the Street) the operating issues in its supercenters, such as unproductive space, and stock shortfall in fast-turning products (fresh food, consumables). That is a recipe for long-term margin and returns pressure.
  • Bill Simon has entered 2014 as the President of Wal-Mart U.S. following another year of over-promising and under-delivering.  I think if performance does not stabilize shortly, the company will make a change in its U.S. leadership ahead of back to school 2014.
  • At +2.4%, Wal-Mart's inventory growth continues to run in advance of its negative comps. This is something on display in my latest video footage inside Wal-Mart stores. Specifically, excess clothing and seasonal goods on deep discount in dedicated areas of the store (such as garden centers).
  • Core Wal-Mart and Sam's Club 4Q 2013 comps (excluding online) -0.7% and -0.5% respectively. My interpretation is that this performance was worse than implied by management's warning issued in late January.
  • Gross margin -40 bps in 4Q 2013, giving us a glimpse into what Wal-Mart is having to do on price to compete with price matching competitors and their (and its own) websites.
  • Wal-Mart U.S. president noted it will address underperforming U.S. stores.  Reiterate: here come the store closures.
  • Price investments overseas are hammering international segment margins, with no clear indication this will abate.

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