The Daily Dose: Turbulent Times

 | Aug 08, 2014 | 10:30 AM EDT
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The market is looking pretty darn ugly. As I said earlier in the week, the turbulence was likely to continue, as the market tries to adjust for renewed headline risk and what that means for earnings from many multinational companies. The market is telling us a few interesting things right now:

  1. Corporate management teams of multinational companies have not full articulated the risks to sales and profits from geopolitical unrest.
  2. Investors don't appreciate what a risk to a business really is; things have gotten too easy.
  3. The market is in for one heck of a turbulent ride in early 2015, as Fed support is pulled back (interest rates will still be super low).
  4. Domestic companies may be the better bet at the moment; some attractive entry points could be had as the broader market is revalued.

Quick Take on Lululemon

While the market cheered the news of Chip Wilson selling a part of his stake, theoretically relieving some of the headline risk from the prolonged board squabbles, buyer beware. Here are two things I decoded from this news bomb:

  1. Lululemon (LULU) is likely to issue a disappointing quarter and outlook (again) when it announces earnings on September 11. Not only have I been unimpressed with the lack of newness in the assortments, Under Armour's (UA) growing dominance in women, and increased floor space at Dick's (DKS) and Macy's (M) as seen in the second quarter likely was siphoned right from the cash registers of Lululemon.
  2. Chip Wilson in not so many words suggested Lululemon, although having ample growth opportunity, does not own the female athletic apparel market and does not deserve to be valued as such by the market. Barriers to entry have come down, and the fact is rivals are doing a better job getting more versatile products to market quicker than Lululemon.

What's Up with Gap?

Things have been a little off for Gap (GPS) of late. First, the stock has underperformed shares of Macy's and J.C. Penney (JCP) since mid-March. Second, after notching seven straight quarters of year-over-year adjusted EPS growth, Gap's adjusted EPS has declined for two straight quarters. Third, inventory growth has outpaced sales growth for five consecutive quarters, a no-no in retail. And finally, the Gap brand's same-store sales missed consensus forecasts in June.

The primary culprit for all of this is intense discounting among specialty apparel makers and weak denim sales at the Gap brand. However, Gap's July sales solidly beat consensus, and the company issued adjusted 2Q EPS guidance a couple cents above consensus. Here is why the market viewed the results favorably:

  • Gap brand's sales are holding up better than feared due to new introductions in woven and athleisure bottoms.
  • New "reserve online, pick up in store" is maximizing inventory productivity.
  • Banana Republic sales have been on the comeback trail before the release of an entirely new creative direction for the brand, which is being viewed as driving renewed interest.
  • Old Navy's continued positive same-store sales growth suggests it has carved out a niche in an industry being dominated by Forever 21 and H&M.



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