Retail stocks are getting rocked, meaning people didn't anticipate the trade and are losing bank.
Here is the mood on the Street with these stocks that were easy money earlier in the year. First, results from J.C. Penney (JCP), Kohl's (KSS) and Macy's (M) suggest people will need mouth-watering deals this spring and summer to actually buy something. Mouth-watering deals come at the expense of the fat profit margins investors had anticipated due to an improving labor market and cheaper fuel costs. Hey, Shake Shack's (SHAK) meaty first-quarter sales had to come from somewhere -- and it appears to have been derived straight out of the cash registers of hulking department stores. Three Shack burgers during the week add up to about $30, or the price of a pair of Wrangler's -- owned by VF Corp. (VFC).
And two, all of these companies are in a period of reinvestment in their business -- fancy new shops with the best vendor presentations, new technologies being placed in the sweaty hands of associates, and more marketing dollars on social networks. All of these things are weighing on profits that aren't as slim as when times were really good in the economy, say in 2006.
In the hopes of preventing you from holding a bag of overvalued retail stocks, here are the scoops on what Wall Street will be watching when the reporting season kicks into gear next week.
Home Depot (HD) and Lowe's (LOW)
Talk about places to hide in retail, these two home improvement names have been it. Both have delivered same-store sales ahead of others in retail as investing in one's home has been in favor. Margins have expanded as execs have found new ways to extract efficiencies, such as putting new handheld technology in the hands of store associates and unveiling enhanced distribution facilities.
But the latest crop of earnings reports just has an odd feel around them in their lead-up -- it seems as if no matter what these companies report, it won't be enough to satisfy Wall Street's expectations. And the last thing you want to be exposed to is being on the wrong side of an unwinding trade on fear of overvaluation.
I think the sales numbers for both companies will not be as strong as the market expects, owing to unseasonable weather. The saving grace is if optimistic comments are made on the earnings calls regarding demand in late April/early May when the weather improved. If Home Depot gets knocked down on the earnings print, it may be a buy on weakness -- the company often comments on its call about quarter-to-date sales, which I happen to believe have started on solid footing.
Target (TGT) and Wal-Mart (WMT)
Similar companies in theory, but they are very different in the eyes of Wall Street right now. Wal-Mart is in the process of making its prices more competitive to grocery and dollar stores. It has also not shown me anything to suggest it's about to go on a beat-and-raise story in terms of earnings. Actually, the company has been a serial under-earner in recent quarters. I think Wal-Mart's shares being dead money since January is a tell on the first-quarter and mixed second-quarter guidance.
As for Target, it had a great consumer response to Lilly Pulitzer apparel, which likely created a short-term halo around other departments, like cosmetics. Wall Street digs new CEO Brian Cornell, as do I. Target could put up a solid quarter and continue to win over fans.
Get this: Sears' shares are up 29% this year. Believe me, it feels odd for me to mention that given my history with this company that thinks it's still a retailer (it is technically -- it sells real estate to newly created REITs as opposed to things people actually want or need). Nevertheless, when the company reports earnings next Friday, the market is likely to shift its attention back to the atrocious fundamentals of the company and a cast of execs who are only execs in title sense.
For much of the year, the market has given Sears' laggard business a pass as it has hatched interesting ways to extract value from real estate. Now, with those headline-grabbing maneuvers in the rearview mirror, the market could be ready to penalize Sears' shares again.
Want to decode how bad Sears' top line was in the first quarter? Try thinking on these:
1. J.C. Penney is regaining the Middle America customer in numerous categories.
2. Macy's is investing more money in its top locations to make them flashier, which pressures demand at Sears' top stores.
3. Gas savings are being spent on soda and other impulse items at convenience and grocery stores, not Kmart.
4. Sears' own going-out-of-business sales depress sales and the bottom line.