Finally, the air on retail fantasy island has been cleared.
Most interesting about the 36%-plus gain in retail last year was the fact that earnings were actually pretty bad for the most part. Turns out Thursday was the day of overdue retail reality checks.
J.C. Penney (JCP) started us off earlier in the week by not telling us how sales performed in December, but they are, of course, "really pleased." Investors, however, are not pleased with the lack of information. I suspect margins will once again look like a train wreck as promotions are the only way to claw back sales. As I said in my J.C. Penney article Thursday, please take a Dramamine if you are going to ride this ride -- or, better yet just stay away.
In the "your bad is worse than my bad" press release category, Sears (SHLD) actually made J.C. Penney look good. After a press release rambling about being a "member centric integrated retailer," the retail dinosaur hit us with a negative 7.4% same-store-sales number -- even appliances were negative. Seriously, guys, we read beyond the first two paragraphs.
We had perhaps the most surprising news of retail D-Day on Thursday night. Abercrombie & Fitch (ANF) reported holiday comps decreased a better-than-expected 6%, with a 4% drop in the U.S. and a 10% fall overseas. The company actually raised guidance due to better sales and cost-cutting.
While the stock was up 12% in recent trading, I believe the gross-margin pain incurred to get to that comp may send the stock back to reality when the company reports earnings. But CEO Mike Jeffries still has a job for now -- and here come the stock upgrades. Watch for opportunities to be on the negative side of this trade.
The other margin-challenged teen names are also getting a boost, thanks to Aeropostale (ARO) bailing on the ICRxchange Retail Conference. That left investors wondering if the company will be sold. That leaves us with the last teen "A" -- American Eagle (AEO) The best of a bad lot reported comps down 7% but, as with Gap (GPS), American Eagle got a pass for coming in at the low end of guidance. In this environment, earnings in the ballpark of guidance is enough to move stocks higher.
In my opinion, the biggest opportunity from the fall out of Retail D-Day is L Brands (LB). Limited did exactly what they told investors they would do -- the company hit the promotional pedal to drive comps. A 2% comp increase sent the stock down as margins will weigh on earnings. In the category of "slow and steady wins the race," I will be picking up more LB for 2014.