Big developments are brewing in the field of finance this month, as companies look to secure their fates early on in the new year.
Here are a few things that should be on your radar screen.
Retail LBOs and Disaster Stories
Just checkout what the week has brought in retail land:
1. Coach (COH) trying to bail itself out of a horrible 2015 by purchasing a high-end luxury brand that the majority of Americans have never heard of before.
2. Dick's Sporting Goods (DKS) rumored to be seeking an LBO because its business model is flawed, so why not cash out at today's still lofty valuation.
3. Teen apparel retailer Wet Seal (WTSL) will shutter 2/3 of its stores that nobody visits any longer ¿ this retailer's traffic and sales have gone into the registers of Macy's (M), H&M, and Forever 21.
I think the next few weeks will bring some huge developments in retail, for starters, because the pitches by well-paid execs to private equity teams flow easier with a returning U.S. consumer (and yes, the consumer has returned). Second, retailers have not finalized their inventory, marketing and capex plans for 2015, so there is the typical window for execs to listen to ideas from outside teams with mega pocketbooks that will re-IPO a company by the year 2021. The added gasoline this year: a rush by companies to conclude deals in a rock bottom interest rate environment.
Furthermore, January is often the month in which store leases comp up for renewal; there will be a new wave of closures sweeping malls across the country, and don't rule out announcements from Wal-mart (WMT) and Target (TGT). I believe for the likes of Abercrombie & Fitch (ANF), American Eagle Outfitters (AEO), Gap (GPS), Aeropostale (ARO) and Sears (SHLD), 2015 will mark a greater number of store closure announcements than have already been conveyed to Wall Street. Here come the asset impairments.
But specifically to all this LBO chatter: be careful. I have seen deal speculation time and time again in retail artificially boost valuations on flawed companies, only to have them stay public and go onto report miserable earnings reports that destroy the stock price. Due to J.C. Penney's (JCP) better than expected holiday season, and Dick's LBO rumors, names such as Kohl's (KSS) and TJ Maxx are discussed as buyout candidates. Now their valuations (and others) embed a modest buyout assumption. I would not be buying retailers for takeovers. Focus on the holiday numbers and 2015 outlooks.
Regarding Dick's, I think its business model is flawed, and am not ready to say it's going to be removed from the public markets amid a sweet deal. Things to consider on Dick's:
1. Huge bi-level stores selling goods that could easily be bought online.
2. The company's top vendors like Nike (NKE), Under Armour (UA) and VF Corp (VFC) are aggressively opening their own retail stores that offer personalized service and top-tier assortments.
3. The golf business is on a long-term decline as boomers age and play fewer golf rounds.
The Headline-Grabbing Earnings Warning
J.C. Penney's uplifting pre-announcement was certainly welcomed news, having sat through five ugly sessions for the market. However, let's not forget that FedEx (FDX) earnings miss from a couple weeks ago, and softer manufacturing data. Coupled with interesting weakness in the transport stocks, the market may be sniffing out a headline-grabbing earnings shortfall later this month. When I say headline-grabbing, I mean a disappointing report from a well-established company that sets the tone for trading for several weeks ahead.
I fancy consumer staples rather than discretionaries. Coca-Cola (KO), for example, is poised to deliver the disappointments given their overseas exposures.