I have a bunch of research projects well underway at the moment, all of which are beginning to chip away at my sanity. Numbers. Facts. False facts from executives. Spreadsheets. Fun stuff, but very taxing on the mind. Here is an overview of one project.
Project #1: What Retailer Needs to Change ASAP?
I have put these three retailers in a bucket titled "In Big Trouble." That means that executives today are not seeing the future of the business and sticking to failed or unproven strategies. Should no change come to these companies, hopefully by early-to-mid 2015, it's unlikely to be a pleasant year for their shareholders.
Dick's Sporting Goods (DKS)
- The stores are too big, with too much unproductive space.
- The company continues to aggressively open stores, not following the path of supercenter-lover Wal-Mart (WMT), which has decided to slow the pace of large box openings in 2015.
The company reports third-quarter earnings next week and I suspect the numbers will be underwhelming, as will the holiday quarter guidance. The athletic apparel sections at Macy's (M) and J.C. Penney (JCP) continue to be on fire, acting as share thieves from Dick's. Moreover, key vendors like V.F. Corp. (VFC), Nike (NKE) and Under Armour (UA) continue to add new retail stores, offering better products to consumers than found in Dick's. I even view the success of Foot Locker (FL) as a tell on the potential of Dick's to report a set of third-quarter numbers that fails to inspire Wall Street.
Best Buy (BBY)
- When I last met with the company a couple months back, it was basically articulated to me not to expect another mass store closure program, as was implemented a few years ago. I think more stores need to go.
- Wal-Mart said electronics was a soft spot in its third quarter due to a lack of innovative new products. What about the iPhone 6?
I want to believe Best Buy's improved store presentation and online business will have led to a solid quarter, but can't get behind that right now. Further, I can't get behind the holiday guidance being anything but sufficiently below consensus as to spark concern on Wall Street.
Abercrombie & Fitch (ANF)
Of the companies listed here, the outlook for Abercrombie & Fitch bothers me the most. At least Best Buy offers better electronics merchandise, and services, at comparable prices to Wal-Mart and Target (TGT). Dick's Sporting Goods at least is known for a destination for athletic gear and hunting equipment. Abercrombie & Fitch, on the other hand, continues to fight the issues of misguided product, a stale business model, inept management and fast fashion players that are opening stores, while Abercrombie exits the mall in some instances. An entire generation is growing up viewing apparel as being able to be bought on the cheap. Abercrombie's model is not set up to survive that rationale.
I suspect the company will try to raise debt in 2015 to thwart murmurs of a future liquidity bind.
Food for Thought this Morning
If Twitter (TWTR) received a junk debt rating from S&P, what does that say about the cost of credit outlook for Amazon (AMZN)? You see that company's unadjusted profit (ahem, losses) results the past two years?
Wal-Mart's +0.5% U.S. comparable sales and $0.03 a share earnings beat (lower than expected tax rate) got much of the attention yesterday, which is logical following the company's Debbie Downer Oct. 15 analyst day. But, when cutting through the pomp and circumstance inherent to anything Wal-Mart does and releases, I ask the simple question: how good was Wal-Mart's quarter really?
Supercenters were not called out by executives as a contributor to the better-than-expected U.S. comps. I reiterate, as part of its ongoing extensive business review, Wal-Mart will likely announce store closures (Target is doing them) in February 2015 when holiday numbers are issued. In my view, Wal-Mart must reduce its cost and expense base as it reinvests in price to compete with real-time mobile pricing (which it's doing via the new Savings Catcher app) and lays global technological infrastructure. Closing underperforming stores is imperative for Wal-Mart reigniting its earnings growth by calendar 2016.
U.S. comps were aided by net inflation, no surprise in light of the price increases being assumed by General Mills (GIS), Kimberly-Clark (KMB) and other packaged goods companies, as well as inflation in proteins. I think the 0.7% U.S. traffic decline, despite plunging gas prices, spotlights why Wal-Mart relayed below-consensus earnings guidance for the holiday quarter. Its core customer remains under financial stress and, in most cases, duress. The traffic is even more intriguing as Wal-Mart cycles quarters of declines in the key measure. Theoretically, some improvement should be seen.