While Best Buy's (BBY) better-than-expected second-quarter earnings answered the question on whether it could compete with juggernaut Amazon (AMZN) in the short term (it can), there are at least two topics still up for debate in retail earnings season.
Interestingly, they both have nothing to do with the rise of online shopping or drones being tasked with dropping packages on doorsteps by the year 2025. Rather, they harken back to the very basic analysis that used to be commonplace when assessing retailers. I say very basic, as analyzing a retailer's prospects is anything but basic nowadays -- for example, investors are being left in the dark by most retailers in terms of the bottom-line performance of online operations. Horrible, seeing as where so much capex is being spent, but that is a debate for a different day.
Question 1: How are Dollar Stores Influenced by Walmart's Revival?
Making money in dollar stores such as Dollar Tree (DLTR) and Dollar General (DG) has been ridiculously easy the past two years. Let's take a look at some of the drivers of the dollar-store trade. First has been an explosion of private-label products on their shelves, which tend to carry lucrative profit margins. Second, these companies continue to open a mind-numbing amount of stores in the country. Product inflation has been benign, which is incredibly important to a dollar-store model. The stores don't need a large number of workers, helping to counteract concerns on wage pressures. And finally, more people have fallen in love with dollar stores as places to buy cheap stuff that isn't really poor quality. I am sure there are many more, but that is the general list.
However, during the past two years of the dollar-store dominance, Walmart (WMT) has been stumbling around with its marketing, store presentation, customer service and pricing. Low-income America lost confidence in Walmart being the best possible price on weekly essentials and instead headed off to a dollar store. Now, though, Walmart is a giant ship that is gaining momentum thanks to big-time investments in price (especially in food), private-label products and the store shopping environment. I don't think Walmart is going to crush the quarters from dollar stores this year by any means. But with shares of dollar stores priced to perfection, even a slight tick down in same-store sales growth for the dollar stores could be viewed negatively by Wall Street.
Walmart's second quarter gave strong reason to believe dollar stores lost a little bit of share in the second quarter. Not a great deal, but just enough for the stocks to have sell-the-news trading sessions later this week when the companies report.
Question 2: How Bad Is Bad for Sears?
It has also been very easy to make money in Sears (SHLD) the past two years ... by shorting the heck out of the stock. I don't think that short-Sears investment thesis will flame out following the company's loss-per-share report, due out Thursday morning. In fact, the selloff could get worse as the second quarter stands to be much worse than what Wall Street is expecting.
Several signs point to this happening: (1) Home Depot (HD) , Lowe's (LOW) and Best Buy continue to pummel Sears in the appliance business; (2) electronics sales were weak at Walmart and Target (TGT) in the second quarter, which have better assortments than Sears; (3) J.C. Penney JCP had a solid quarter in apparel thanks to continued marketing of deals, and Macy's (M) did OK, too -- Sears was the likely loser here.
I suspect the quarter from Sears will be so bad that people will voice concern on the company getting the inventory it needs to drive its business during the holiday season. And if it doesn't have the inventory during the most important quarter of the year, look for the market to reason the company could be headed for a financial tailspin sometime in 2017.
