The Daily Dose: Target Buyer Beware

 | Aug 18, 2014 | 9:30 AM EDT
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Usually, Wal-Mart's (WMT) stats and guidance officially kick things off in retail earnings season. This week brings fresh info to digest from Home Depot (HD), Lowe's (LOW), and the beleaguered Target (TGT). Regarding the latter, I think the company is preparing to issue at least one more eye-opening earnings warning. Buyer beware.

Even as retailers failed to light up financially in the second quarter despite accelerating job growth and improved weather, there are a couple things to take note of:

  • Wal-Mart shares did not drop like a rock in water in the face of an ugly full-year earnings warning.
  • Commentary on the start of the back-to-school shopping period has been encouraging.  However, I am concerned whether that demand surge in the final week of July represented the peak. This could mean a slow August upsetting the longs that nibbled at the sector on the thesis of an inflection point in margins.

Lo and behold, the S&P Retail Index has outperformed the S&P 500 in the past month. Talk about an early Santa Claus Rally...


S&P Retail Index vs. S&P 500
Source: Bloomberg


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  • Nordstrom's (JWN) important anniversary event had sales above year-ago levels. Positive signals on the upcoming holiday season to see those in the upper income bracket unleash their spending power. Nordstrom noted that the promotional environment moderated in the last several months. The comment makes me view Macy's (M) quarter as much weaker than I first thought; the company just didn't seem to play in full-price sales land. 
  • There is a renewal of sorts in the mall-based cosmetics business. Nordstrom mentioned cosmetics were one of its top sales divisions in the second quarter. At Kohl's (KSS), it's in the process of rolling out a new beauty shop presentation to tap into the strong demand it's realizing in cosmetics. 
  • Kohl's had a 2% same-store sales increase in the last week of July, and characterized it as "exceptionally strong." Macy's and J.C. Penney also conveyed that back-to-school shopping was robust last month.
  • Many retailers are really looking to unveil key online and mobile initiatives into year-end (such as buy online, pick up in store), reaffirming my long-held opinion that the country remains over-stored. I still think investors do not appreciate the restructuring plans waiting in the wings for many retailers, all designed to more efficiently operate their businesses longer term.  

P.S. Sears (SHLD) has announced a small wave of new store closures of late, with the majority of the stores set to be dark by November (before the holiday season, which is a red flag on the second quarter and outlook). Liquidation sales at these locations will begin later this month in most instances. 

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