Don't pin your investing hopes this spring on data unearthed from government lifers, pin them on two companies that have their pulses on America: J.C. Penney (JCP) and Macy's (M).
The differences between the first-quarter performances of these department store giants were striking. Actually, the divergence was something that began brewing last year. Yet, not many on Wall Street discuss this because, well, they are dominated by analysts and trading desks that love to shop at Macy's. And, Macy's CEO Terry Lundgren has a record (and a reputation as smooth talker) that is unrivaled in the retail sector.
Yet, somewhat boring J.C. Penney posted healthier sales than Macy's did. Its gross margins expanded, whereas Macy's were basically flat. Penney lifted guidance, while Macy's reiterated a range that incorporates anticipation for a spending splurge by consumers this holiday season. Amid all of the results and comments, there were at the very least three things to know about the economy that I don't think is being reflected in macro reports. They include:
- Middle America is spending more this year than you are being led to believe. Maybe it's due to the decline in gas prices, but five months or so of dour retail sales reports have investors believing the U.S. consumer is dead this year. Not true -- in fact, it could be captured in the upward revisions to April's retail sales report. Pent-up demand is being released; you just have to know where it's being released in the consumer sector. Of particular note for both Macy's and J.C. Penney were solid sales in men's and women's apparel. Furthermore, J.C. Penney mentioned strength in children's apparel and cosmetics, both of which have no choice but to be replenished (cosmetics run out and children outgrew/ruin their clothes).
- J.C. Penney's Sephora cosmetics business remains on fire, and is a hidden gem within the company. Later this month, the business will finally receive its own website in concert with J.C. Penney, which I believe will be a nice profit win for the company. But the success with Sephora underscores that consumers are back to buying impulse items. Yes, cosmetics have to be replenished, but Sephora is a pricier trip in many cases than to Target (TGT) or Wal-Mart (WMT). This willingness to spend on wants instead of needs bodes well for the warmer weather months, and is something I hear is playing out in my talks with PepsiCo (PEP), Newell Rubbermaid (NWL) and various other packaged-goods companies. I'm a big fan of Rubbermaid, secondarily Target -- if J.C. Penney had success in cosmetics and private label apparel, Target likely did the same. Target's quarter was likely bolstered by its Lily Pulitzer launch.
- One mention by Macy's CFO stuck with me overnight: Sales of watches were weak in the first quarter. I believe this was the first sign of the effect to the watch industry of the Apple (AAPL) Watch. Consumers may have decided to forego a purchase of Fossil (FOSL) at Macy's to save up for the Apple Watch, which is competitive on price to Fossil models. I would be concerned about the results for the remainder of the year not only for Fossil, but Coach (COH), Michael Kors (KORS) and Movado (MOV), which dominate the watch displays at the department stores.
In the end, the performances of Macy's and J.C. Penney said that, yes, there will be a holiday season this year. It may even be stronger than expected.