The Daily Dose: More from the Retail Whisperer

 | Aug 19, 2014 | 11:00 AM EDT
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Overall I would say that, in the recent avalanche of retail earnings, the companies that have been performing very well in the past year continue to do so. But I would caution that in the case of some -- say, a name such as Home Depot (HD) -- the results are starting to mature a little on key line items, notably gross margin.

For example, Home Depot's gross margin fell 1 basis point year over year. That's not a huge drop obviously, but it follows more moderate first-quarter expansion of 5 bps, year over year. The company's earnings beats are being increasingly fueled by share repurchases and expense leverage, and that represents a shift from what investors have been accustomed to during the home-improvement retailer's two-year recovery.

On a less dreary note, here is what I liked about Home Depot's strong quarter:

• It saw sequential improvement in average-ticket growth.

• Its U.S. same-store sales figure, 6.4%, trounced most of the retail sector for the second quarter. This number also appeared to build on Home Deport's solid start in May, as articulated in the first-quarter earnings call by Chief Financial Officer Carol Tome.

• Inventory growth was brought down, as the company had promised.

• There is clear momentum in the business amid three months of strengthening existing-home sales in the U.S. This morning brought the second straight full year earnings-guidance lift from the company.

Importantly, CEO Frank Blake delivered on the bullish comments that he had offered on the first-quarter call, establishing further Street cred for an executive team that flat-out continues to execute. Those comments were as follows:

"In previous years, we've talked about the bathtub effect that weather can have on our spring seasonal business, where weak sales in the first quarter are counterbalanced by strength in the seasonal business in the second quarter. We expect the same effect to be true this year. As we look at the performance of our business in the first quarter, the strength in the areas of the country where more normal weather existed supports this outlook.

"And our fundamental view on the recovery and the home improvement market has not changed. We didn't expect the recovery in 2014 to be as dramatic as last year's, but we continue to believe that home price appreciation, affordability and an aging housing stock in need of investment will continue to drive growth."

Elsewhere in retail, however, the stories are from friendly.


At Aeropostale (AEO), the situation has become similar to that of the Mike Ullman scenario at J.C. Penney (JCP): Former CEO Julian Geiger has returned to the helm that he vacated a couple years ago.

However, I am not as euphoric about his return as many analysts are. Geiger arguably did not position the company correctly for the changing competitive dynamics in the teen-apparel market, and he remained an aggressive opener of stores right into his exit from the company. Essentially he handed off a ship quietly leaking water to the now-outgoing CEO Tom Johnson. Further, the company's better-than-expected second-quarter bottom line -- also shared on the CEO-announcement press release -- still reflects a major loss.

Geiger will have a tough time keeping Aeropostale afloat, given the company's cash-burn rate, which has been caused by the rise of fast fashion retailers and mobile-based consumption.


During Wednesday morning's scheduled Target (TGT) call, I expect a robust full-year earnings warning -- worse than the one from Wal-Mart (WMT). I also expect its Canadian results will not reflect the optimistic comments that have been shared by the company recently.

If Target delivers a true kitchen-sink quarter and outlook, watch how the stock reacts -- keep in mind that Wal-Mart shares went higher on its earnings-warning day last week. I think if Target lays it all on the line to investors so that they fully understand the forward risks and can model accordingly in outyears, the stock may be worth a look.

Note that my firm, Belus Capital Advisors, rates Target a Sell, and I personally do not anticipate a change in rating until the same-store-sales trend improves or until the company begins closing lagging domestic and Canadian stores. Of course, I realize some folks do not have the same long-term horizon as my clients do.

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