Who's Got the Funk?

 | Jul 10, 2014 | 12:52 PM EDT
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Is the consumer in a funk? Or is she just in a funk when she goes to The Container Store (TCS)? Is the consumer holding off plans to re-model her house after the big winter storms? Or is she just not using the flooring from Lumber Liquidators (LL)? Did gardeners start spring planting later, or did they just not get their supplies at Tractor Supply (TSCO)?

These are the questions coursing through investors' heads as they try to make sense of these last few misses from the highly touted initial public offering of Container Store, the Steady Eddie farm and garden merchant that is Tractor Supply, and the flooring specialist Lumber Liquidators.

First, I don't think there is a "funk," and I wasn't keen on The Container Store's CEO using that word to describe what happened after the weather got better but the customers didn't return. Shoppers at Williams-Sonoma (WSM) didn't experience a funk after the weather cleared, or before the weather cleared, for that matter. Shoppers at Restoration Hardware (RH) spent like mad before, during and after the tough winter. They were not in a funk; they were euphoric.

I point these two out because when The Container Store came public, we willingly analogized to those two as The Container Store was known for its upscale offerings, not its cut-rate prices. You can't suddenly declare that the consumer is in a funk when it is that consumer because we know she's shopping in overdrive. I also am not crazy about the "We thought it was the weather, but it turns out it was the mood" transition, because it represents a lack of soul-searching and a snap judgment that won't easily be forgotten.

Tractor Supply? I am somewhat more impressed with its analysis: it is a late spring. Hence, why it is barely down? But we value Tractor Supply for consistent growth, thus the $23 price-to-earnings multiple -- and that has to be sacrificed here. The stock's too high.

Most problematic of all is Lumber Liquidators. I found its excuse for their big drop-off in same-store sales (that once a customer cancels a prospective flooring job because of the weather, he doesn't reschedule it promptly) to be more than a little fatuous. Sure, the stores that caused most of the winter shortfall also lagged badly in the most recent quarter, but there is simply no excuse for May and June to be as weak as they were. Lumber Liquidators can bounce, but this one's looking very one-hit-wonderish.

More important, I believe the weakness of these three points to a real issue dogging the retail stocks, and that's the inability of single-purpose retailers to deliver numbers with great regularity. For a few years, we have fallen in love with specialty-growth retailers, only to remember when push comes to shove that we like the balanced approach that the broadline retailers can give us, because when one business lags, other lines of business can save them.

We also see the value in investing in seasoned retailers. Costco (COST) knows how to adjust to the seasons, and so can a Home Depot (HD), which I know is going to stay down as collateral damage but I bet weathers the weather and whatever funk there might be. Lumber Liquidators seems downright silly in its introspection, if you can call it that, and The Container Store doesn't even seem to ask, like Cassius, if the fault could possibly be in themselves and not the funky stars.

Home Depot and Costco would simply say, "We need to do a better job of executing."

So my takeaway is a clean one: If, indeed, things are spotty out there, don't play with this group -- but if you do, go with those names that are executing superbly, and don't pick those that blame the weather or the customer. Those retailers are better to shop at than to own.

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