The old saying is that "retail is detail." It's also a saying that could be applied to how investors should be thinking through the first round of retail earnings this week.
There will be plenty of noise inside of the fourth quarter financials and earnings calls from retailers -- thanks in large part to the late arrival of old man winter in the U.S. and currency fluctuations. For multinational retailers such as V.F. Corp (VFC), Nike (NKE) and Decker's Outdoor (DECK), currency shifts have weighed on sales, margins and outlooks -- a true trifecta of ugliness. As a result of this noise, investors have a tough task -- either pay attention to the core parts of the business or the overall performance of the business, which includes currency and weather impacts.
I think you have to look deep into the souls of retailers right now instead of the overall company. It's the businesses with good souls that stand to surprise on tepid guidance when the year is all said and done, as currency and weather fade into the rearview mirrors.
A worthy example could be V.F. Corp. I had the opportunity to chat with its long-time, retiring CFO (great guy) post-earnings last week. I believe the market placed too much emphasis on the firm's currency-adjusted 2015 outlook and one-time asset write-down of smaller businesses in the portfolio.
Key considerations:
- Via new innovations in fit and fabric, the company's women's jeans business is starting to come back. With easy sales comparisons to 2014 (due to women transitioning to athleisure fabrics and fits), the business could show much better sales results as the year progresses.
- The company has two, new product lines -- Fuseform and Thermoball -- that will be share gainers on the floors of major retailers this year.
- V.F. Corp has recently opened three product innovation centers, where I believe some new innovative products will flow from to be sold in 2016.
A couple other things to keep in mind on retail include:
Port delays
The delays will cost retailers, both from the expense and sales sides, this spring. It's going to be important to actually listen to earnings calls for the sector this time around. We will have to see if products are being-rerouted, if there are associated costs to do so and when the products are scheduled to arrive on sales floors.
I think the most at risk here are the apparel retailers, and even the footwear retailers. Making matters worse is that the sector is being hit by higher costs to expand online infrastructure and permanent discounting. We could see some ugly first quarter outlooks from, for example, Abercrombie & Fitch to Finish Line.
The return of Mother Nature weighed on January's sales
The whiteout conditions in many parts of the country in mid to late January, based on my contacts, led to many mall closures and delayed store openings. So, just by that, retailers were hurt. But, also, the weather had the effect of depressing the moods of consumers who had pockets filled with gift cards.
Adding insult to injury, poor weather into February has weighed on sales of spring -related gear now hitting the floors of retailers. Investors may be surprised by the soft-profit performances of both the fourth quarter and the subdued tones of management teams on earnings calls. Guidance will be backend-weighted (retailers banking on strong back to school and holiday 2015 sales).
Key Earnings Reports for the Week
Walmart -- I wear my feelings on the long-term fate of Walmart (WMT) (and Sears (SHLD)) on my sleeve. I believe Walmart is not doing enough today to position itself correctly for the future of retailing. U.S. superstores need to be shrunk, with many categories moving to online-only availability. Underperforming U.S. stores need to be closed. Fledgling operations in certain overseas markets must be exited.
Nevertheless, I think Walmart could have put up a better-than-expected fourth-quarter sales performance in its U.S. business due to cheaper gas prices and improved employment market conditions. I got to this conclusion rather easily: V.F. Corp's Lee business, which calls mass merchant sales floors home, had a very solid quarter. In addition to improved offerings, I think the performance of Lee suggests Walmart's low income customers spent a little more than one would think during the holidays and in January.
Risks to this more upbeat logic include: snowstorms in the Northeast (Walmart has consistently declined to comment to me on store closings/delayed openings caused by storms since January); price investments; a quietly resurgent Target and currency translation.
Denny's -- Flat out will give you a good read on the real U.S. economy. Denny's (DENN) remains America's stop for truckers. It's also a place where a mom on a budget can take her two kids for a Sunday morning splurge with extra money in the pocketbook.
