Soul Searching in Retail

 | Nov 22, 2013 | 7:26 AM EST
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There's an awful lot of soul searching going on in retail right now. It's become one of those moments where management teams are wondering about what happened this quarter, which, for many but not all, was a very tough one. 

Just yesterday after the bell, three retailers that we expected more from, Gap (GPS), The Fresh Market (TFM) and Ross Stores (RST), delivered less. Some would say much less.

The Gap, fresh from giving shorts a slam about the head with some terrific monthly October comps, reported overall comps that were a total letdown and signaled that there was, in the word of excellent CEO Glenn Murphy, a lot of "fatigue" among the consumers. I didn't think the quarter was all that bad, but the Street, exemplified by BMO, thinks that the momentum has peaked, in part because of disappointing gross margins and that the lack of upside guidance could spell the end to the streak. I think that's severe, but the nation's largest apparel chain didn't give you much reason to hold on to it after that $37-to-$41 romp.

Ross Stores was a real puzzler. The quarter was worrisome on all fronts, including a marked deterioration throughout the quarter. I think it is safe to say after examining this quarter that Ross Stores is officially the poor man's TJX (TJX), without a lot of new assortment and without a lot of brand names that attracted shoppers. This terrific regional-to-national growth story may recover, but you could hear the analyst dismay as Ross lost its most-favored-nation status.

But the most worrisome of the three was The Fresh Market because this one had real momentum not that long ago and seemed to be a legitimate challenge to Whole Foods (WFM). Lots of the conference call was devoted to two problematic cluster launches, Sacramento and Houston, that simply were disappointing, causing analysts to question whether this company could handle a nationwide rollout, so vital to maintaining that elevated 33 price-to-earnings multiple. That one will shrink quickly. It does call into mind, though, the possibility of both saturation and a lack of differentiation not just between Whole Foods and The Fresh Market, but between the national supermarkets that are clearly catching up to these specialty organic and natural supermarkets. Also, it calls into question the expansion plans of the company. Why open three stores in the Sacramento area at the same time? Whole Foods only has one there. What makes The Fresh Market's team even think there's a demand for that many of their stores in that portion of the country. It just seemed like a tactical mistake.

I left this call thinking that this group's become downright dangerous, although it does put into perspective how good Whole Foods is in maintaining 5% comps, which are appreciably better than those of The Fresh Market. 

You could argue all three have their issues. But when you ponder over that terrible Target (TGT) quarter, where somehow Canada was blamed for some of the shortfall -- which is always a chuckle -- the downbeat Wal-Mart (WMT) quarter and the abysmal Kohl's (KSS) number, plus the lauded, but hardly laudable J.C. Penney (JCP) quarter, you don't come up with a pretty picture for the country or for these mass retailers in general.

Now it is true that this shows Costco (COST), Starbucks (SBUX), Macy's (M), Home Depot (HD) and TJX, all of which had outstanding quarters, as being shrewd operators. But you have to wonder maybe their model's better. Costco's got the club, Starbucks has the pizazz and fabulous execution, TJX has the cheapest branded merchandise, so all three of those are models that work. Macy's and Home Depot seem to be riding a wave of changes made over many years, as well as the power of higher home prices.

The weaker companies almost to a man cited Washington, but the companies with quarters that shined had to deal with Washington, too. That's why I am calling into question the way these companies do business with a new frugal consumer. Some just aren't up to it and may not be investable until they figure things out. But the winners? Their stocks are the ones to buy every time they come in. They've figured out this new consumer. They will do well now and thrive when things ultimately do get better in this country.



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