Retail Roundup: The Good With the Bad

 | Aug 20, 2013 | 1:00 PM EDT
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For J.C. Penney, Halloween Comes Early

J.C. Penney (JCP) reported second-quarter earnings this morning. The quarter was downright scary, but not as scary as some had expected. There was just enough good news to spark a relief rally before the open.

Penney reported a second-quarter loss of $2.16 per share, substantially worse than analysts' expectations of a loss of just $1.02. Revenue fell 11.9% to $2.66 billion, which was $120 million (or 4.3%) less than anticipated.

Heavy markdowns and aggressive couponing helped to drive traffic. Same-store sales declined 11.9%, but that was an improvement over the same period last year. In fact, sales improved sequentially each month within the quarter; a trend that management expects to continue throughout the rest of the year.

Gross margin took a pounding. Margins fell to 29.6%, compared with 33.2% a year earlier. The company reported a net loss of $586 million, or $2.66 a share (including one-time items), from $147 million a year earlier.

News that investor Kyle Bass had bought some of the company's secured loans gave renewed confidence that J.C. Penney would have continued access to capital as it struggles through the balance of the year. This stock should continue to struggle for a while.

Home Depot Digs Up Sales

This morning, Home Depot (JCP) reported earnings per share that were $0.03 ahead of consensus. Same-store sales increased 10.7%, its best second-quarter performance in a decade.

Revenue rose 9.5% to $22.52 billion, compared with the consensus of $21.79 billion. The quarter had one less week than last year's second quarter, and that reduced sales by about $249 million. Seasonal items and the housing recovery drove sales.

Management raised guidance for the back half of the year. For fiscal 2014, Home Depot expects revenue to increase 4.5% to $78 billion, up from its previous estimate of 2.8% or $76.85 billion.

Dick's Sporting Goods Has Putting Problems

Dick's Sporting Goods (DKS) dropped the ball. The company reported earnings per share that were $0.03 less than expected and cut guidance. Revenue grew 6.5% to $1.531 billion. The company guided third-quarter earnings to $0.38 a share, down from expectations of $0.47. Management also took a swing at fiscal 2014 guidance. The company lowered guidance from a range of $2.85 to $2.86 to a range of $2.60 to $2.65.

Management blamed golfers for the weak quarter. Apparently, you don't need to buy a new set of golf clubs every year!

Best Buy and Urban Outfitters Win Big

Best Buy (BBY) and Urban Outfitters (URBN) were the big winners this morning.

Best Buy has been aggressively cutting expenses and revamping its stores in an effort to stay competitive. Best Buy is trying to stop the decline in same-store sales and operating margins. Investors saw enough progress to bid the shares higher before the open.

Revenue fell 0.4% to $9.3 billion, and same-store sales declined 0.4%. But the jump in gross margins helped propel the stock. Gross margins rose to 27.4% from 24.3% last year. The improvement in gross margins followed through to the bottom line, and earnings per share were $0.21 better than expected. The stock is up about 160% year to date, so the turnaround is priced in.

The report from Urban Outfitters was the best of the bunch, and it should drive the stock much higher. The company reported that same-store sales rose 9% and sales grew 12%, driven by fewer markdowns at its Anthropologie stores.

In the retail apparel space, Urban Outfitters has the best combination of top-line and bottom-line momentum. Management expects to see continued margin improvement as the company has fewer markdowns into the holiday season. Imagine an apparel company selling goods at full price into the holidays! Totally unheard of. Urban's unique offerings still appeal to teens, and the company has shown it can still pull traffic in the door.

I believe Urban Outfitters is going much higher. Strong comps and improving margins should drive the stock into the high $50s.

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