The weather is warming up, and Fed officials see a lovely 5% unemployment rate by year end.
An opportune time to buy up retail stocks, right? Well, not exactly, judging by the direction of some charts of several high-profile names. To see shares of Wal-Mart (WMT), Polo Ralph Lauren (RL) and Chipotle (CMG) -- and even the Whole Foods (WFM) drubbing last week -- continuing to act weak alongside a bounce-back April employment report is worrisome. In fact, it calls into question the hopes by many on the Street of a hearty spring resurgence in GDP growth of the magnitude that pushes the Fed to start a liftoff on rates.
For me, weak stock charts are worrisome for a few other reasons. They include:
1. Port congestion has ended. Retailers already have the product in their stores that they thought consumers would want this spring. Better-looking stock charts would suggest consumers are buying these goods at close to full price.
2. Gas prices, although higher from the trough, continue to be down year over year. Much has been said in recent months on how people spend savings from the gas pump. While I don't believe all the savings are being socked away into Bank of America (BAC) savings accounts, there remains careful allocation of discretionary dollars by heads of households. Weak stock charts tell me consumers will be content to maintain their existing pace of spending, mostly on services, this spring. They simply lack trust in the direction of gas prices.
3. Retailers, cruise line operators, restaurants, anything that touches the wallet of a consumer seem to be trying to raise prices. Norwegian Cruise Lines (NCLH), for example, is now charging for room service. Ugh. Striking price increases on products and services and stagnant wages raise the prospect of a couple of ugly earnings surprises from the retail sector this month. If pushed, I think it's going to come from the apparel-selling department store sector -- a thesis that could appear in Macy's (M) and Kohl's (KSS) earnings later this week. I would be particularly concerned with the margin structure of J.C. Penney (JCP) from the first quarter. And outside of the department stores, I think Abercrombie & Fitch (ANF) will deliver another ugly, ugly earnings report (and no news regarding a new CEO).
Here are those three worrying charts.
The stock is well off its 52-week high, set earlier in the year just as gas prices have crept higher. Furthermore, it's underperforming the Dow Jones Industrial Average and S&P 500. Pretty telling as to the true health of Middle America, huh? The market is saying it doesn't trust the frames of mind of budget-oriented households, which could change with even the slightest tick higher in gas and food prices. I think Wal-Mart will offer disappointing second-quarter earnings guidance this month -- the company is in the midst of narrowing prices vs. rivals and may have only realized a so-so Mother Day's period.
More of a message here than the strong dollar impact to Wal-Mart's sales is that the stock has continued to lag as the dollar has weakened of late.
Polo Ralph Lauren
Coach (COH) execs made some interesting comments on the current competitive environment last week, mostly that it remains very promotional. Anecdotally, I have seen a good bit of discounting on the floors of department stores in the past month during my walks. I think Polo Ralph Lauren's chart is a classic tee-up to disappointing news (again) on earnings day. And it's not only discounting at department stores, it's more aggressive prices (for now) at outlet centers, where Polo does sizable business.
I prefer VF Corp. (VFC) in the wholesale/retail sector -- the company is gaining share for the fall/winter 2015 season and is on a product innovation streak. Product innovation is what protects margins in wholesale apparel, and I don't see enough of it from Polo Ralph Lauren.
Yes, the company's first-quarter earnings report was not well received -- sales growth slowed (still absurdly strong on a relative basis) and there was concern on the impact to traffic from looming price increases on beef offerings. But with the weather warming up lately, I would like to see Chipotle shares also warming up in a nod to consumers being able to handle the upcoming price increases.
Chipotle, in my view, is the new economic indicator.
On the positive side, Home Depot (HD) and Lowe's (LOW) shares are perking up. Valuation on the home improvement names are pretty lofty, but I do believe each will have positive things to say soon in the following areas:
1. How the spring buying season has commenced.
2. Consumers opening their wallets on more expensive products and services.
3. Sales lift from rampant storm activity in the Midwest and the prospect for a busy hurricane season (Ana arrived early).