The Daily Dose: A Threadbare Consumer

 | Jul 15, 2014 | 1:00 PM EDT
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The early read on the Street is that June's retail sales indicate solid footing for the U.S. economy. Here come those gross domestic product revisions! Still, don't be fooled by these numbers, which say that core retail sales advanced 0.6% in June -- better than the consensus estimate for a 0.5% increase -- and that May has been upwardly revised to 0.2%. The fact is that retailers are driving poor-quality sales, and that means risk remains elevated when it comes to investing in the sector.

I know you probably got all hot on beaten-up retailers after reading Barron's this past weekend. But listen to me carefully: Valuations on many otherwise "attractive" retail stocks stand to get cheaper as the industry searches for a bottom in margins. Or, at the very least, wait until the market shows that it can handle, say, Aeropostale (ARO) notching 200 basis points of gross-margin compression and a modest warning on the back-to-school season. In other words, before the sector begins announcing earnings in August, I want to see retail stocks react positively to the bad news we've started to receive.

Until that point, it will remain hard to view the risk-reward ratio as favorable. In the meantime, I encourage you to do what I am doing -- comb SEC filings from those retailers that are casting black clouds over the industry. Oh yeah, and Wolverine Worldwide's (WWW) announcement today -- that it will be closing 140 stores -- is bound to be the first of many retailers conveying new restructuring plans to investors in the coming weeks.

Beneath the Retail Headlines

  • The Container Store (TCS) coined the phrase of the summer in finance land, noting the retail sector is in a "funk." However, in its 10-Q filing with the SEC, it offered more troubling comments, notably that it delivered more discounted merchandise to customers due to a key annual sale extension.
  • Lumber Liquidators (LL), in an earnings warning, says that its sales mix is leaning toward lower-margin merchandise, and that it's implementing greater discounting.
  • Family Dollar (FDO) laid it all on the table for investors. Not only does the company continues to have trouble selling profitable discretionary merchandise, but it's showing fewer markups across its assortment.

As for key price performance, look to none other than those in the mall, where price competition has intensified to clear out merchandise before back-to-school. Shares of Macy's (M), J.C. Penney (JCP), Sears (SHLD) and Gap (GPS) have fallen by an average of 2.5% in the past week, underperforming both the S&P 500 and the Dow, which have been relatively flat.

More Shopping-Mall Tidbits

I believe Microsoft (MSFT) is making solid inroads in the mall, as it has recently unveiled a new retail-store prototype. The company does not disclose its retail-store financials -- but watch out, Apple (AAPL). Microsoft's product may be as boring as heck, but its stores are likely to capture wowed mall-goers.

Meanwhile, it bothers me that J.C. Penney has been unable to secure a top CEO talent, Mindy Grossman. This is certainly cause for mild concern as we approach the company's second-quarter earnings release.

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