Retail stocks have made some fairly dramatic moves inside of five sessions. But for many names that have been swept up into the mixture of blind buying by the bulls and short covering by the bears, the gains are simply undeserved -- based on company fundamentals.
The market has now priced in retailers having avoided second-quarter disaster scenarios through a combination of clever executive speak (talking down the sellside) and discounting that drove above-plan sales. Now, retailers that beat by $0.05 or more may not receive the same type of euphoric reaction the market delivered last week: They will be more highly scrutinized relative to their peers. And that's when things often get dicey.
Here are a couple of names I would be cautious on, headed into their respective earnings reports this month.
Tiffany & Co (TIF)
The summer heat may have gotten to you if you think Tiffany deserves to be up over 7% in a month. Source: Yahoo Finance
Throughout my career, I have often used results from Macy's (M) and Nordstrom (JWN) to gauge what high-end jewelry firm Tiffany may report, since there is a ton of customer overlap and store-location overlap. This time around, neither Macy's nor Nordstrom gave me confidence in what's ahead for Tiffany. Any negative news will likely whack its oddly strong-performing stock. I am looking for same-store sales misses in the U.S. and Europe, and another disappointing outlook (greater than the market thinks).
Macy's noted that tourism flows to its urban flagships were only slightly improved, sequentially. That is despite the onset of warm weather spurring needs-based apparel buying. Tiffany sells nothing a person needs, unless you are getting married -- and in that case many customers would now head to online jeweller Blue Nile (NILE) for a better price. As for Nordstrom, its top-performing categories were shoes, handbags and denim -- jewelry was not called out.
Add in Tiffany's outsized exposure to EU tourist areas, where traffic has been weak since the terrorism attacks, and mixed results from the aforementioned Blue Nile, and it is highly unlikely TIF will offer anything inspiring in the coming weeks.
Abercrombie & Fitch (ANF)
Abercrombie has made some great operational strides, but a 14% pop in its stock over the last month is too much. Source: Yahoo Finance
Abercrombie & Fitch has impressed me for going on a year. First off, there are actual adults finally running the joint. The store base has largely been cleaned up (and more closures are likely over next two years). Merchandise at all divisions is vastly improved. But, the surprising negative directional change in Abercrombie's same-store sales in the first quarter, coupled with the stock's recent strength, has me short-term bearish. As do a couple of other things gleaned from department store earnings last week.
First, denim has been a strong seller for Macy's, Dividend Stock Advisor portfolio name Kohl's (KSS) and J.C. Penney (JCP) , as has the children's department more broadly.This back-to-school season, I believe parents will be even more value focused than the norm -- and department stores are prepared to take advantage. That's a negative for specialty apparel retailers, such as Abercrombie & Fitch. Target (TGT) is also back in apparel, and has a pretty solid assortment in the teen and kid departments.
There is also EU risks to Abercrombie, similar to Tiffany & Co, that the market has likely forgotten about. I wouldn't be surprised if the company moves to close some underperforming flagship stores over the next year to reduce such risks.