In Retail, Pessimism Doesn't Pay

 | Nov 01, 2012 | 12:23 PM EDT  | Comments
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Stock quotes in this article:

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wrc

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jwn

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vfc

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nke

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You know what's been a real sucker trade? Being gloomy about retail. I keep thinking back to last night's interview with Manny Chirico, the CEO of PVH (PVH), which made that remarkable move on Warnaco (WRC). At the same time that he announced that deal, he pointed out that October was a very strong month for his company, a statement that's incredible, given the breadth of his business, which encompasses shirts, slacks, ties and shoes at a host of different price points.

Frankly, that's not supposed to be happening. We've heard endlessly that October was not a strong month in this economy. We know it from the tech businesses we have heard from. We know it from the giant industrials. We know it from the chemical companies and the materials companies.

But you know who we don't know it from? The consumer. And the consumer is remarkable in this country. Whether it be homes or cars or shirts or sweaters, the consumer is spending beyond what would seem to be possible.

Every time you think the consumer is quitting, whether it be because there's a hiccup at Coach (COH), or a downbeat number from Nike (NKE), or a disappointment from Deckers Outdoor (DECK), or a skipped beat at VF Corp. (VFC), you draw the wrong conclusion.

Hedge funds in particular are guilty of this kind of corrosive, across-the-board thinking. They don't think, hmm, Coach has taken its eye off the ball in this country by stopping its couponing. Instead, they short every department store. They don't think, aha, Nike's charging too much for goods in China, they say footwear is awful everywhere. They don't think Uggs, the key brand from Deckers, has peaked, they think the stores that carry Uggs, like Nordstrom (JWN) and Macy's (M), have stopped ringing up big sales. And when VF Corp. botches the quarter, they don't stop to ponder how strong the U.S. was and how Europe offset it, they just bet against every apparel company.

Which brings me back to PVH. You know a stock doesn't go up 20% in a day just because you bump numbers by $0.30, which is how much the company predicted it would gain simply by purchasing Warnaco with its Calvin Klein jeans and underwear licensing businesses.
PVH goes up that much, and then follows up with another rally today, because so many hedge funds are short it. They figured, how can they lose if the analogs to PVH, the shoe, handbag and outerwear makers, had messed up?

The answer is that the other companies simply didn't execute as well as they should, and when they get the execution right, people will flock right back to their stocks. Plus, it doesn't hurt to get terrific numbers from the likes of Macy's, Kohl's (KSS), and Nordstrom, as we did today.

The extrapolation of weakness from the weaker reporting apparel and store chains never seems to stop, though, simply because the vast majority of active trigger-pullers just can't get their arms around the idea that the consumer is alive and well, especially not with this slow employment growth. They seemed shocked when something good happens. They are constantly fearing and betting on the worst happening when the smarter wager is to bet on the consumer, not against her.

Ladies and gentleman, gloom is not a strategy. It is a feeling, and the feeling has not been actionable, no matter how many times people try to shoehorn it into their stock thinking. So before you get too negative across the board because of one player's weakness, remember the PVH run. Sometimes the big money is made with optimism, not pessimism, especially when it comes to U.S. retail spending.

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