I'm Done Sticking My Neck Out for Retail

 | Aug 14, 2014 | 10:00 AM EDT
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Today, J.C. Penney (JCP), Nordstrom (JWN) and Dillard (DDS) are scheduled to report earnings. After Macy's (M) earnings miss on Wednesday, how can you hold out any hope for this group of retailers? Macy's reported decent traffic, but margins fell as consumers demanded more discounts. Management sounded depressed about the second half of the year, and investors ran for cover.

Year to date, the most impressive stock performer is Dillard's, with a gain of 19%, mostly on takeover speculation. Nordstrom is up a little under 10%, and J.C. Penney is up only 5%.

Back in May Dillard's tuned in fiscal first-quarter earnings that beat the Street estimate by $0.08 per share, but the quarter wasn't as impressive as it had seemed. Investors needed a microscope to find the top line at Dillard's. First-quarter revenue fell 0.06% to $1.55 billion. Without takeover talk, the stock wouldn't have run as far as it has done.

For the second quarter, analysts are looking for revenue of $1.53 billion, or a gain of 1%. Earnings are expected to be up 8%. For the year, Dillard's has guided investors to $6.77 billion, or a 2% rise.

Don't expect any fireworks from the Dillard's third quarter, either. The second- and third-quarter revenue estimates are almost exactly the same -- $1.53 billion. Either the analyst community has fallen asleep at their spreadsheets, or nobody has any confidence Dillard's can put together a decent back-to-school season. Flat sequential quarters point to virtually no same-store-sales growth -- and dismal stock performance.

Nordstrom is a little different. Analysts believe the second quarter will be up 6% to $3.39 billion and that the company will earn $0.94 per share. But then the fun starts. Investors are modeling the third quarter up 7.8%, and the fourth up almost 8%. For the entire year, analysts expect Nordstrom's top line to grow 7% to $13.4 billion. If the company hits its numbers for the year, earnings will total around $3.90 per share.

The problem is that Nordstrom stock is only 5% away from the consensus target price of $72 per share. Investors seem to have figured out that the company's upscale customer is coming back, and that these folks should be around for the holidays. Nordstrom is doing very well with its discount chain, called "The Rack." This and Haute Look, its e-commerce offering, are behind the impressive performance.

What can I say about J.C. Penney? The company continues to climb out of its hole. For the year, sales should be up about 4% to $12.38 billion. The second quarter should show some decent growth. Based on heavy advertising and aggressive markdowns, the company could achieve 4.5% revenue growth on top of the 6.3% growth seen in the first quarter. This company remains a work in progress, and could be a speculative play on a turnaround.  

While I was surprised by Macy's' earnings report the other day, I still believe my original thesis will play out. The company reported earnings of $0.80 per share, $0.06 worse than the consensus and $0.07 short of my expectations. In my opinion, the shortfall mostly came from lower margins and slightly lower traffic. Some have said Macy's has an inventory problem, but to me it seems seasonal.

Same-stores sales were up 3.4%, slightly lower than the 3.6% consensus. Right now management doesn't believe it can pick up the lost sales in the back half of the year, but I'm really looking out towards next year. As I said, I'm not too concerned about the second quarter, simply because it's only 22% of revenue and it's in a lousy part of the year. Macy's knows how to drive back-to-school sales, and I bet after last quarter's results, the company will pull out all the stops going forward.

You don't have to tell me it's hard being long any retailer nowadays. I think I'd rather own a portfolio of airline stocks and gold miners. I'm done sticking my neck out on this group. I'll wait until these companies report before I make any decisions.

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