Contrary to the opinion at the moment, the consumer is not in a recession and retail is not dying -- and some companies are still doing quite well.
But, wow, talk about negative sentiment on the sector (which doesn't surprise me ... been writing about the possibility of it for weeks, mall observations since September have been worrying). The sentiment hasn't come out of the blue by any means. Companies such as Macy's (M) and Nordstrom (JWN) are guiding down materially, on top of delivering very depressing third quarters in terms of sales and margins. In the world of assessing retail stocks, that is a wicked concoction in that it offers no reason to believe the market is missing a key element to the story. On the other hand, charts of retailers that haven't reported earnings yet, such as Target (TGT) and Best Buy (BBY), continue to break down in anticipation of bad news. It has been a week to forget for the retail sector, that much is for sure.
That said, I think it's important to bust a couple of myths being tossed about by traders who enjoy playing momentum but have no clue on the fundamentals of the retail sector. Sure, the traders who short retail have made a killing this week, but these are the same folks who are likely to miss out on longer-term opportunities when the fundamentals begin to normalize.
Myth 1: The Consumer Is Leading Us Into a Recession in 2016
This is false. The U.S. consumer is spending, and in some cases spending aggressively. Home improvement goods, high-definition TVs, eating bistro boxes and drinking lattes at Starbucks (SBUX) three times a day all lead the list of what is being purchased. These trends do not exist if the consumer is readying to hunker down for fear of job loss, pay cuts or whispers of mass layoffs at work. Relax.
Moreover, it's not that the consumer has stopped spending, it's that they are spending differently. Consumers are seeing more value in buying a new, entry-level Whirlpool (WHR) dryer for $500 as opposed to a new Michael Kors (KORS) handbag that would join the five other ones collecting dust in the closet. Consumers are also buying merchandise digitally, which is an element getting lost in the weak store sales for retailers.
Myth 2: Malls and Specialty Stores Are Awash With Excess Inventory
Again, false. I encourage all of the clowns saying this to hop in their car this weekend and visit the local mall. Go into every single well-known retail store, count shirts and shoes as I do, visit the handbag sections. Stop by the jeans department, then head upstairs to the home goods area. The retail sector is awash in winter goods such as hats, scarves and jackets in large part because the weather has been abnormally warm since September. At the core of their operations, retailers continue to manage their inventories quite well. Best Buy isn't overstocked on Beats headphones from what I can tell. Macy's looks fine to me in Nike (NKE) sneaker categories. Under Armour (UA) lightweight jackets aren't being given away because there are 500 unsold units in the backroom. Cosmetics at J.C. Penney's (JCP) Sephora shops continue to sell briskly, and were likely a key driver of better-than-expected third-quarter same-store sales. (Under Armour is part of TheStreet's Growth Seeker portfolio.)
As a result of the many divergences in retail, there are opportunities to start considering either ahead of earnings this month or once you are comfortable in the risk associated with going against sentiment.
Zumiez/Abercrombie & Fitch (ZUMZ, ANF): Teen retail is not the place to be -- unless it's American Eagle (AEO), a name I mentioned months ago here (company just guided higher) -- even in spite of the discounts being found in the sector right now for winter items. The prices are loftier relative to the slash-and-burn tactics being seen at some of the department stores for comparable gear. Specifically to Zumiez, I don't like its exposure to cold-weather items, which are simply not moving off the floor in this type of warm weather. Abercrombie & Fitch last weekend had already taken 50% of its pricey, best-in-class winter jackets -- not a good sign.
Starbucks: The company's robust third quarter in the U.S. was panned a little, believe it or not. Many wanted more on the earnings line; can't blame them. But how awesome does the coffee king's quarter in the U.S. look today in light of the carnage sweeping through the broader retail sector? I like how the stock has held firm relative to the pressured retail sector this week.
Best Buy: For the better part of 2015, electronics have sold well -- and Best Buy has performed OK. Macy's CEO Terry Lundgren told me Wednesday people are buying tech gadgets instead of clothes, and the data support the view. It's an opinion also being echoed by many apparel executives. And, hey, Apple (AAPL) had a great quarter. So why couldn't Best Buy be doing pretty reasonably as the holiday season nears? (Target, Starbucks and Apple are part of TheStreet's Action Alerts PLUS portfolio.)
Sears (SHLD): If Macy's sales were strongly negative, and J.C. Penney posted a 6.4% comp increase for the third quarter, be ready to see a horrific quarter from Sears. I think you could see comps down near double-digit percentages for both chains -- Kmart should outperform Sears since it sells food. Sears stores I have checked are overrun with winter gear, and low-quality winter gear to boot.
Home Depot (HD): Numbers from homebuilder D.R. Horton (DHI) this week looked swell. Home Depot shares have held up nicely this week (great job of Macy's adding former Home Depot CEO Frank Blake to its board this week -- very strong operationally minded executive who drove huge results). Macy's numbers told me people are buying home goods. Whirlpool had a decent quarter in the U.S. I suspect Home Depot will deliver when it announces soon.
Foot Locker (FL): The stock has totally been tossed in the trash, despite it not being truly exposed to winter goods (it sells some boots, but not many, and is not a player in winter apparel). I would be spying this one as the holiday season will likely be solid for a footwear retailer significantly outperforming a key rival in Finish Line (FINL) -- whose stock just hit a new 52-week low -- and strong innovation cycle in footwear driven by Nike, Adidas and Under Armour.
Honorable mention: Place TJ Maxx (TJX) on the watch list -- I think it is going to get some amazing inventory buys on name-brand winter merchandise from key vendors.
