The Daily Dose: A Big, Sloppy Mess

 | May 21, 2014 | 10:00 AM EDT
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The retail earnings season bloodbath is fully under way in all its ugliness. Go figure, J.C. Penney (JCP) is one of the only retailers to have its first-quarter report embraced by the market, and it announced a whopping loss per share. Aside from Dick's Sporting Goods (DKS), which I thought would have delivered a soft quarter due to sluggish demand for golf equipment (but not as soft as detailed by management), the entire season has turned into a big, sloppy mess.

Here is what I am seeing from the battlefield:

Four Reasons for Dick's Golf Equipment Failure

  1. A glut of inventory within the wholesale and retail channels. Golfers love eBay (EBAY) for their purchases.
  2. Discounts have intensified. Dick's is now selling drivers for $99.99 that only 20 months ago were ticketed at $299.99 (already below the normal price of $399.99).
  3. Core and casual golfers just don't see the value in trading up to new "technology" in drivers and irons. Golf balls are a different story.
  4. Golf courses are shrinking, as are the number of rounds played. Time for Tiger Woods to go on a run again with those majors.

Takeaway: With sales in hunting and golf continuing to track very negatively, and despite the drastic full-year earnings warning, the stock is likely to remain under pressure. Revisit around $40.

Broader Retail Checklist of Concerns

Store closures are only preventing gross and operating margins from falling further, they are not leading to the expansion the market priced in when hearing of massive new restructuring plans. Staples (SPLS) is an example of a retailer caught in a death spiral, a brutal quarter where store closures did not favorably influence profit margins. Most notable: Staples had weak sales of core office supplies at its stores and commercial businesses. Apparently, people are buying office supplies and golf equipment on eBay.

Home Depot's (HD) long-tenured CEO noted quarter-to-date sales were "robust," helping to turn the stock around intraday after its earnings miss. But the CEO made a key statement regarding housing market dynamics that went overlooked. That was price increases in some markets are weighing on housing turnover, which is a key driver of Home Depot's business.

Urban Outfitter's (URBN) quarter was a serious red flag for all specialty apparel retailers. Inventory levels coming into the second quarter are too high given how consumers are shopping (closer to need) and the speed in which competitors are releasing fresh fashions at an unbeatable price. Aeropostale, Zumiez (ZUMZ), and The Buckle (BKE) will likely forecast below consensus for the second half.

Target Canada

Read this and keep this in mind: More changes in the retail sector will be coming very shortly. If you own a single share in a retailer be sure to study carefully the backgrounds of executives being brought into the company and promoted. I believe Target's (TGT) reshuffling in Canada and in the U.S. are tactics to stabilize the business, with new leaders (hopefully) from outside the company being brought in 2015.

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