For yours truly, it almost feels like the calm before the epic storm. Black Friday coverage looms large, but before that so does an avalanche of earnings and outlooks from the retail sector. Briefly, here is what I expect from a sector that, theoretically, should be thriving amid plunging gas prices and more job creation (it's not...):
Third quarter: Minimal operating margin expansion from best-in-class operators and surprisingly disappointing margin erosion for the laggards.
The material profit warnings from teen apparel retailer Abercrombie & Fitch (ANF), and womenswear purveyor Ann (ANN), on Friday hint at bad news from Aeropostale (ARO), American Eagle Outfitters (AEO), and even Macy's (M). I have no idea how Gap (GPS) raised its guidance given the promotional activity going on at its stores over the past two months.
Holiday-quarter earnings guidance: Notably below consensus (a consensus that has started to trend down).
The caution on the part of retail/consumer executives in recent weeks has irked me; readings on consumer spending and borrowing have been OK, so where is all of the activity in the malls, off malls, and online stores? Quite weird, indeed.
Look for profit warnings to further weigh on shares in the sector.
Should things occur as I see it now, then an investor could entertain bottom fishing based on this logic:
- Another absurdly cold winter (read the latest news reports) sparks impulse buying of cold weather gear. Potential winner: V.F. Corp. (VFC), which owns North Face and is experiencing a resurgence in the Timberland brand.
- News in January from the sector would then likely be above consensus forecasts (sales and earnings per share) that were marked down today.
- News of exec changes and buyouts surface early on in 2015. There is likely to be deal news involving private equity in the first half of next year, possibly in specialty apparel. I also believe activists are planning to target big-box retailers, which are pouring money into infrastructure with limited returns to show for it thus far. Don't rule out Wal-Mart (WMT) being an activist target, especially as Target (TGT) is announcing store closures and Sears (SHLD) is converting into a real estate investment trust.
That said, this week is being billed as a quiet one. If I have learned anything in this bushiness it's that weeks deemed quiet usually turn out to be the complete opposite. Here is where I am focused:
Walmart: The world's largest retailer reports third-quarter earnings on Thursday morning. I anticipate Walmart U.S. had same-store sales in the quarter toward the low end of guidance, and that the company will warn on the holiday quarter. The warning last week from General Mills (GIS) reaffirmed my view of Walmart's potential lackluster news this Thursday. I also have not been a fan of elevated promotional activity throughout the sales floor at Target; it reeks of a below-plan quarter due to cautious consumer spending by "Moms of America." Any warning from Walmart is likely to pressure shares of Best Buy (BBY) (which is price matching Walmart and Amazon now), Electronic Arts (EA), Activision Blizzard (ATVI), Hasbro (HAS), and Mattel (MAT).
Fed officials: Assorted Federal Reserve folks will be making the public speaking rounds this week, headlined by Vice Chairman Stanley Fischer. It will be particularly interesting to see if they are a teensy bit more hawkish following the mediocre October employment report. Any tone along the lines of a hawk may spook the market -- the thesis being that mediocre growth is joining hands with a Fed on a path to raise rates in mid-to-late 2015. Be advised, however, that Fed Chair Janet Yellen did sound rather dovish this weekend in a speech.
Read her remarks, it's worth the effort this morning.