The Daily Dose: Parsing a Trio of Retailers

 | Feb 27, 2014 | 9:30 AM EST  | Comments
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In this column, I am going to share future news on the companies below: Here are some fresh insights from Wednesday's earnings calls out of Target (TGT), Dollar Tree (DLTR) and Abercrombie & Fitch (ANF). All of these are bound to appear in analyst upgrades and downgrades before long.

Dollar Tree

On Wednesday, after a pre-market slip in Dollar Tree stock, why did it recover in the regular session? Well, the company delivered an earnings call in which it pitched itself as a friend to a still-struggling low-income consumer. Here is what I learned.

First, Dollar Tree's important same-store-sales metric was driven by increased traffic and average ticket. While others in retail battled against weak traffic due to storm activity, people increasingly went to Dollar Tree. That's not a great sign for the U.S. economy, but it bodes well for Dollar Tree shareholders.

Second, sales were positive towards the end of January. Again, that is the complete opposite of what we have been hearing from other retailers.

If there are risks to the rising stock price, one is that the company is in the middle of a price war with Wal-Mart (WMT) and other discounters. That is hurting profit margins. Another is a potential higher national minimum wage, and Dollar Tree's expected investment in a new distribution facility next year. Both of these are bound to hurt Dollar Tree's profit levels.

Abercrombie & Fitch

The sole reason for Wednesday's pop in A&F shares was that the company is slashing expenses, and this finally starting to show up on the profit line -- and more quickly than anyone had believed possible. How is A&F doing this? It's closing more and more stores. That said, I would be a little concerned, given what we've learned on the earnings call.

First, store traffic continues to be "significantly" down at all store formats.

Second, sales remain under pressure in Europe. That's even as many other companies in retail, such as Ralph Lauren (RL), are experiencing renewed sales gains from the region. My concern: Has Abercrombie lost its international appeal?

Beyond this, for now A&F's cost-cutting ways will indeed alleviate the company from needing to drop prices in order to compete with Zara, Forever 21, H&M, and Fast Retailing subsidiary Uniqulo. However, the company did note that its average unit retail prices will come down further in 2014, especially in women's items. That has me worried about the profit potential of the business during back-to-school and the holidays, when A&F's cost cuts will start wrapping up.

Finally, a fun fact: Abercrombie will close 60 to 70 stores in the U.S. in 2014. By the end of this year, the company will have closed about 300 domestic stores since 2010.

Target

Mr. Market jumped Target shares on the handful of positive comments in the press release, and on the mention of "flat" same-store sales in February. But I would approach with caution.

That's because, first, I believe Target is preparing a major marketing and price-investment campaign designed to rebuild its customer traffic. There could be risk to still-optimistic fiscal-second-quarter guidance.

Second, Target's inventory growth was 11% into 2014. That is bothersome -- and management's explanation for it was, well, nonexistent.

Third, Canada sales and bottom-line guidance for 2014 were way, way too optimistic.

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