With Walmart's (WMT) earnings out of the way, the book could now be closed on the reporting season for the consumer space and full attention turned to the start of the holiday shopping season.
Suffice it to say, it has been quite the past several weeks in the consumer space. Restaurants kicked things off with a thud, highlighting slowing sales growth and sharing comments on tepid industry conditions as we head into 2017. All in all, the restaurant commentary was on the depressing side. Then mall-based retailers such as Macy's (M) chimed in with much better than expected third quarter earnings as consumers -- surprisingly -- bought a ton of fall apparel, despite warm weather and the negative election headlines. For good measure, department stores reiterated their full-year outlooks by and large. And finally, there were discounters such as Walmart and Target (TGT) , who have promised to go all out to win every single dollar consumers earmarked toward holiday spending. To what extent that price war takes a toll on their bottom lines is, per the usual, the million-dollar question.
Here's a run through of some thoughts on several of the sector's best-known companies. There are worthwhile stocks to hold through the holidays, and others to avoid like the plague.
McDonald's MCD: Allow me to give you a little scoop on something. McDonald's corporate is the worst team I have to deal with on a somewhat regular basis for my job. Due to my critical analysis of McDonald's for years, the company doesn't invite me to events (such as one Thursday that was a few blocks from our office, which unveiled a new table service; CEO Steve Easterbrook was on hand) and won't return many of the basic questions I inquire about. Their approach is unfortunate, in the grand scheme of things. People deserve information, and reporters, even those with critical takes, deserve to be treated with respect. Those feelings aside, I don't need an email from McDonald's head of communications and Obama guy Robert Gibbs to help provide context on one thing: the impact of grocery store price inflation on the demand to eat out. Walmart and Target showed serious food price deflation at its U.S. stores during the third quarter, and execs gave no indication it will abate despite the pickup in the CPI fueling reflation fears. As long as food deflation persists, McDonald's will likely continue to put up tepid sales growth (perhaps even negative sales growth in the fourth quarter in the U.S.). That continues to make it tough to say "buy the stock" off the May pullback.
Michael Kors KORS: It will be a rough holiday season for a handbag maker like Michael Kors. Similar to efforts by rival Coach COH, Michael Kors has decided it no longer wants its stuff on sale. So, it's doing a wave of discounting this holiday season to flush out the department store sales floor of slow-selling product. In 2017, the plan is to pull way back on discounting, in an effort to boost average unit selling prices. By boosting prices, the thinking is it will help offset people buying fewer handbags. Looking back at the quarter and conference call, Michael Kors likely represents a great short into the holiday season. The company's fourth quarter will be hurt by its discounting efforts and traffic to its flagship stores will be weak due to mixed trends in foreign tourism. The company's product quality has gotten horrible, and there is also a trend toward smaller bags, which hurts sales. If so inclined to play the handbag space long, it's Coach all day.
TJX Companies (TJX) : While Macy's, Kohl's (KSS) and Nordstrom (JWN) came into favor with traders in the wake of their much better than expected third quarter results and upbeat commentary (holidays, restructuring actions, etc.), it's TJX Companies that will likely win the hearts of investors through the holidays. Despite wholesalers such as Ralph Lauren (RL) cleaning up their supply chain so off-price channels get less product, the reality is that TJ Maxx remains a sourcing wizard that will not run out of great products for this holiday season -- or ever. The company's third quarter was impressive, and when the books are closed on the fourth quarter it will likely mark another standout performance. One of the most structurally sound retailers in the game right now.
Best Buy (BBY) : Hat tip to Best Buy CEO Hubert Joly -- you have proven to be a big-time change agent literally from day one entering the company. I have no idea how the company continues to find ways to cut costs years into a major cost-cutting effort. Meanwhile, sales haven't died in the face of the growing strength of Amazon (AMZN) and Walmart and Target online. Having said that, it's still probably a better bet to play the holiday tech scene directly through a vendor such as Action Alerts PLUS Apple (AAPL) than through a portfolio play such as Best Buy. I like that Target said earlier this week that pre-orders for Apple products were up three times compared to last year. Best Buy will enter 2017 with much higher Wall Street expectations, slowing expense cut opportunities, a new challenger in appliances (J.C. Penney (JCP) ), discounters making improvements on the tech they sell and how they sell it, and a meh tech cycle.
J.C. Penney: Now is the time to put a long trade into action on J.C. Penney. I think the opening of its stores at 3pm on Thanksgiving Day -- a full two hours ahead of Macy's -- will prove to be a huge early win. Come Black Friday, J.C. Penney shares could trend higher on the perception it has won the start of the holiday shopping season. The company's third quarter wasn't great by any means, but there was enough substance there to say it's not a retailer at risk of badly missing holiday plans.
