The Daily Dose: Retail T.N.T.

 | May 13, 2014 | 9:00 AM EDT  | Comments
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jcp

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jwn

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"I'm T.N.T., I'm dynamite"

--"T.N.T." by AC/DC

I just can't get that song out of my head after listening to it on Mother's Day while destroying two 12-year old nephews in basketball. (What, you thought I was going to let them win? Yeah, right.) The AC/DC classic has inspired me to think about which retailer this week could have an exploding stock price following its earnings report. The pickings are slim from the sector currently as most of the names announce next week. So, I am left sniffing around for potential explosions from lumbering giants such as Wal-Mart (WMT), J.C. Penney (JCP), Nordstrom (JWN) and Macy's (M). Here is how I handicap the situations at three of the four.

Wal-Mart

Skinny: Only until recently, the stock was flirting with the Dec. 3, 2013, 52-week high.

Quick Analysis: There were too many obstacles for Wal-Mart to overcome in order for it deliver a strong earnings beat for the first quarter, or anything that would suggest the stock was worthy of trading at its present valuation. I specifically would like to point to:

  1. Horrible weather, which will be used by the U.S. division President Bill Simon as an excuse for another disappointing sales quarter (note Wal-Mart U.S. same-store sales have been negative for four straight quarters)
  2. Price inflation in proteins, including beef and chicken, which may have put pressure on the amount of items placed in the basket (Wal-Mart needs more items in the basket as its store traffic has been abysmal
  3. The company once again over-ordered seasonal holiday-related merchandise, most notably Easter (on recent trips, the stores are still selling Easter merchandise on clearance tables).

Bottom Line: This is not my type of investment in a retail environment that stands to benefit near term from the release of pent up demand. If so inclined to wade into the pressured margin waters, do it through specialty retailers, or ...

J.C. Penney

Skinny: The stock has ripped since my firm's April 10 upgrade, so honestly, I am feeling good provided the first quarter wasn't a bomb. Note that I don't believe the quarter was a bomb; it should suggest that J.C. Penney is turning the corner quicker than the Street expects.

Quick Analysis: What is driving my month's long-guarded optimism on J.C. Penney? Simply stated, I like the activity in the stores and where that activity is occurring (higher-margin departments). The stores are being well merchandised from folding to promotions, and in my opinion look visually more appealing than many Macy's locations. Moreover, Target's (TGT) operating woes should be aiding J.C. Penney's recovery, with that appearing in the home and women's apparel departments.

Bottom Line: I will be riding our upgraded rating into the earnings release; it's sink or swim time for yours truly!

Nordstrom

Skinny: You so want to like this stock given the rising wealth effect associated with an equity market that refuses to stay down.

Quick Analysis: Nordstrom has outlined its intention to spend $3.9 billion over the next five years re-investing in its business, from the stores to technology. In the previous five years, the company invested $2.2 billion. That said, Nordstrom has logged two consecutive sluggish quarters.

Bottom Line: The stock is too expensive for my taste in light of the margin pressures on the business, both from reinvestment and from Macy's opening higher-end sections in its stores (handbags, cosmetics) at more affordable prices than Nordstrom.

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