The Daily Dose: A Taste of Those Retail Numbers

 | May 15, 2014 | 8:30 AM EDT  | Comments
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Retail earnings season has begun to rain down on our heads -- and, as usual, I am darned pumped for it. Of course, it's an extremely stressful period for me and, despite my sunny disposition, I'm liable to lash out if someone rubs me the wrong way during this two-week hell.

For me, the tornado of retail numbers flying around oftentimes take a backseat to what's hot and sexy on the conference calls. What is the new apparel trend? What sector of apparel is running wild -- men or women? What is the management team thinking regarding plans for future key periods? How has the current quarter started? There is more to covering retail earnings season than that which meets the eye.

All that said, for Macy's (M) the numbers themselves are my brief focal point today. Actually, it's just a single number: operating margin. This metric improved from the prior year at Macy's, partly due to another solid quarter of expense management, but also thanks to 10 basis points' worth of merchandise-margin expansion.

Why was this surprising? The quarter started off poorly due to inclement weather, so even Mighty Macy's had to promote in order to sell through its stuff in February and March. But, by and large -- and as Macy's confirmed on the earnings call -- April's generally favorable weather brought people back who were willing to pay full price or first markdown.

Barring an unforeseen economic or national disaster this summer, and despite inflation in protein foods, the U.S. consumer's willingness and ability to pay full price bodes well for the back-to-school season. I certainly sniffed out the euphoria among the sell-side analysts on the Macy's earnings call. They seemed ready to jack up estimates on Macy's, as well as on other leaders in their coverage universe.

So, yes, a happy back-to-school is possible -- unless your name is Sears Holding (SHLD).

Sears Canada -- the Bottom Line

The news of the potential Sears Canada divesture was written on the walls years ago. One should expect Sears to now begin bleeding talent from higher up in the organization, and that is bound to trigger a snowballing of the fundamental problems in the individual stores. Things are about to get much, much worse for Sears.

So why has Sears Canada gotten put on the chopping block as a result of its failures?

First, let's zoom out to the larger retail environment in that country. For American retail companies operating in Canada, their huge No. 1 problem lies in a certain arrogance, if you will: the notion that what has worked well in the U.S. will also work in our neighbor to the north. A great example is Target (TGT), whose Canada locations have witnessed zero infatuation for the chain's "cheap chic" towels and sheets. There, Target is viewed as a more expensive Wal-Mart (WMT). So why not just save money, and live better, by going to Wal-Mart?

The second huge general problem is that U.S.-based retailers try to price their products at a premium in Canada in order to compensate for their investments in the country, and the Canadian market is notoriously cutthroat when it comes to price. Speaking of which, I believe this issue will materialize again when Nordstrom (JWN) opens in Canada next year.

Let's now return to Sears Canada specifically. Since day one of the Sears-Kmart merger, Sears viewed its Canada entity as an outsider -- something from which the mother ship holding corporation could extract money to pay for share buybacks, or for getting out of leases in the U.S.

By now, that lack of nurturing has left Sears Canada as a rogue, dying asset that has faded from the minds of Canadian consumers. Canadians want one-stop shopping and the best possible price, and they want it at Wal-Mart -- which is taking over the country -- and at Costco (COST). Incredibly, the Sears Canada stores look even more dreadful and underinvested in than do the U.S. stores. That's not a good place to be fundamentally.

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