The Daily Dose: The Stamina to Win

 | Sep 26, 2013 | 11:00 AM EDT
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To start off, thank you to everyone who reached out to me Wednesday about our note on J.C. Penney (JCP). I will be frank: We nailed this story before Goldman Sachs analysts did, and it was all spurred by a Sept. 9 chat we had with the company. Having no life truly pays dividends!

At a college I visited recently, a young buck asked, "How do you win? Financial services is hyper-competitive."

I get it. Everyone wants attention, exposure and a cushy job of brown-nosing some higher-up for $110,000 a year. But my answer to this not-uncommon question was twofold. First, you must have a freakish desire to defeat competitors -- i.e., everyone who is not you -- either out in the open or behind the scenes via strategic daily missions. Second, there has to be a continued focus on winning. In financial services, this means seeing things that others have overlooked or spotting a consensus view that makes zero sense and is at risk of unraveling.

That brings me back to our call on the busted-up J.C. Penney, as I have two other outstanding bets. One is a long-running call is on Wal-Mart (WMT) as being "too big to manage." So you can bet your bottom dollar that I believe Wednesday's reports about how this company is cutting holiday orders due to excess inventories.

Forget what these Bentonville Bullies did to the media to pump the stock midway through the Wednesday session, because I see the truth at the store level. CEO Mike Duke has chased unit growth and, in the process, he has let Wal-Mart's internal procedures deteriorate. I say that much in this friendly video. Ultimately, in order to win on my long-term bearish call on Wal-Mart, I have to stay the course on voicing concerns regarding its internal processes. I must remind myself about the real U.S. economy, which is likely causing Wal-Mart to currently deliver below-plan sales and earnings.

We are coming off an earnings season when most retailers warned. They warned because people are not buying at full price, and not buying at first markdown, and not even buying anything at all in some cases. What are warnings? They're missed plans, and with missed plans you have excess inventories -- which had been proudly presented on Wal-Mart's pre-recorded earnings call.

A final note: Wal-Mart has a program that allows you to order online and pick up in-store. If the economy were humming along, inventory would be low, because people would be buy from the store and picking up their online orders.

Let's move on to that second call of mine: I think caution is the name of the game for weather-sensitive suppliers to home-improvement retailers and dealers. The hurricane season has been virtually nonexistent so far this year, so I anticipate inventory excess, production adjustments by original equipment manufacturers and three to six months of heightened earnings risk. Here are some comments following a chat I had with an undisclosed vendor earlier this week.

The top question I asked was this: With the hurricane season weak, are inventories too high at the likes of Home Depot (HD) and Lowe's (LOW)? The question was sort of deflected, though I did get a nice enough explanation. All in all, I am concerned about inventory levels, and I am thinking it's an above-average risk to earnings and guidance -- and maybe not just for this company, but also primary competitor Briggs & Stratton (BGG).

Note that, if inventories are too high, the company will adjust production accordingly. But it could take four to six months to right-size channel inventories, as the main products in question are consumer-oriented -- not $10,000-plus professionally installed units.

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