The entire retail complex resembles a rice paddy straight from the movie "Platoon." Sure, the water is shallow enough to walk through, and dry land is "oh so close." But, underneath the surface there are grenades placed every five inches just waiting to be stepped on.
It's hard to believe this gruesome analogy, given that stock price multiples have been pumped with artificial air? Not really when you cut to the chase on the U.S. consumer:
• Core retail sales have missed consensus for two of the past three months, before the spike in gasoline prices.
• Family Dollar (FDO) has told me they are reducing floor space for discretionary apparel; for the time being their focus is on basics.
• Mall traffic in non-holiday periods remains challenging.
• Here is a take on JC Penney (JCP) laced with reality: Why isn't their new, flashy home department working well? Its consumers don't have the bucks to pull the trigger on a snazzy aluminum teapot, but do have the bucks to snap up a teapot at 50% off at Macy's (M).
What the disconnect between Main Street and Wall Street really means is that to dance with success in the retail sector, and not get blown to pieces, hold true to individual stock section taking precedence over a specific style (for example high end vs. low end). I'll show you why below.
Macy's
- Advice: Try to be a hero with Macy's despite uber negativity on retail stocks.
Does it bother me that shares of Macy's have basically been dead money since its last earnings report? Yes, as the company is usually the go-to name to play in retail because it just throws up magical quarter after magical quarter. However, these are the three reasons that if I have to reach to pick up a grenade from the landmine, hoping it's a dud, Macy's would be it:
• Expectations in the actual numbers (same-store sales, margins) have come down quite a bit into the report.
• If you believe JC Penney is going to announce a horrendous August 20 loss report and all sorts of bad news (I do) there has to be a reason why. That reason: Macy's has gobbled up the former shoppers of JC Penney, perhaps for good.
• Michael Kors (KORS) and Fossil (FOSL) had very strong quarters at wholesale, with the former announcing it's ramping up its shop-in-shop destinations at department stores (only happens if the outlook is not seen falling off a cliff). These are the bigger ticket sales at Macy's that likely aided sales, and get married to a company still finding ways to drive operating efficiencies.
Nordstrom
• Advice: stock prices up, but avoid for now.
The first inclination by investors is to load up on Nordstrom (JWN) because stock prices have gone through the roof in 2013 (which would be focusing on style instead of stock selection). Normally, that would be a fair assessment. Nordstrom is doing things in department store retailing that will position it light years ahead of rivals (such as online ordering, technology use at the store level). For now, though, I say watch this name cross the tape and wave hello. Here is why:
• There is valid concern on the performance of Nordstrom's Anniversary Sales event in the quarter. We're hearing traffic was soft, out of stocks less of the norm compared to 2012 (notably footwear), and there was a slight pickup in promotions. Coupled with 2013 being Nordstrom's investment year, this raises the prospects of a reduction of the top-end of the company's $3.65-$3.80 per share guidance (which was reiterated on the first quarter 2013 earnings call). Considering the Street thinks the stock warrants a valuation premium to peers, a warning would not be met with warm and fuzzy feelings.
Stats/Other Things to Know
• Company missed by $0.01 for the first quarter of 2013 (Nordstrom in show me stock land...as in show me your investments is producing upside earnings!).
• Year to date, the stock has underperformed the SPDR S&P Retail (XRT) and S&P 500 (underscores pressured margins from massive investment).
• Nordstrom has already reduced its total sales growth and same-store sales growth estimates for FY13.
• Two structural shifts in the business that have me concerned near-term (since the market is not pricing this stuff in): (1) very strong rack square footage growth; and (2) rapid growth in the Fashion Rewards program.
