The Daily Dose: Retail Remains Bleak

 | Feb 25, 2014 | 10:00 AM EST
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It's only Tuesday and I have the flipped the old lid in advance of retail sector earnings from Best Buy (BBY), J.C. Penney (JCP), Abercrombie & Fitch (ANF) and my bestie, Sears (SHLD). The macro environment is worsening and nobody cares. The consensus is that there will be a snapback in demand at the conclusion of the first quarter of 2014 once weather normalizes, and this will lead to a resurgence in restaurant and food sales.

So much for thinking reduced worker hours today means anything regarding consumption and transportation in the near term. However, anything but a snapback in growth is being signaled from the leading data and companies. For example, Hovnanian's dreary comments Monday morning on the start to the first quarter of 2014 suggest no signs of a rapid return to mediocre growth. This, in turn sets the stage for a walloping of companies in many exposed industries in light of the negative reaction in Hovnanian's shares yesterday and its peer group.

So if you haven't been watching homebuilder stocks, do so now.

Source: Yahoo Finance

Retail stocks have been dreadful performers for the better part of three months. There have been a few winners, but overall the sector has destroyed some portfolios. That lagging bias has continued into 2014. I take issue with the murmurs on the Street that consumer related stocks are a good wager right now based on improving demand come spring. Further, I believe there is estimate and headline risk from fixed asset write-downs by many retailers to be disclosed super shortly. Assets are under earning lowered expectations by executives, and you don't buy stock in such a company until those assets are earning something more predictable -- and profitable.

Source: Yahoo Finance

Spotlight: Best Buy

The way I see it, Best Buy has three ugly, but true, problems in its stores that no eye-catching restructuring plan will fix this week. As a result of these issues, the price competition battle with Amazon (AMZN), Target (TGT), and Wal-Mart (WMT), and Best Buy's own website, will only make achieving sustainable profits harder.

  1. Open box merchandise bonanza: Best Buy has established the processes to now sell open box TVs, laptops, and other gear in order  to burn off inventory and look like a price king to moms, dads and teens. The problem: That open-box eye candy will pull sales from full-price items.
  2. Shop in shops are sort of tiny: Samsung, Google (GOOG), Microsoft (MSFT), and Apple (AAPL) shops look visually appealing from anywhere inside a Best Buy, and offer intimate customer service. However, the tininess factor of the physical structures means they are often out of stock during the peak holiday season. And Samsung is now opening its own shops.
  3. No traffic drivers: Best Buy can't rely on a single quarter, the holidays, to keep it out of the retail graveyard. It needs a daily traffic driver, which is why I would like to see a Starbucks (SBUX) or even a Wal-Mart pop-up shop inside the stores.

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