The retail sector is in round 2 of earnings reports, and the news is not good.
So far, the market has taken the sector's next wave of negativity in stride -- the Consumer Discretionary Select Sector SPDR Fund (XLY) has gained about 0.1% in the past five days, lagging the Dow's 1% rise. On the sector's reported results, however, there have been several harsh market reactions -- some justified, some unjustified.
But overall, the tone of this week's retail earnings have been negative, which is highlighted by murmurs of inventory getting shipped back to large apparel vendors and a holiday season that is more promotional than Wall Street was expecting.
Full credit for that goes to El Niño, which appears destined to keep temperatures across most of the country abnormally warm well into December. Also, the U.S. consumer continues to demonstrate that they are not spending similar to prior periods of employment and wage growth. I think analysts continue to be thrown for a loop that historical correlations are not working.
Nevertheless, there is a fresh crop of winners and losers to select from mere days before Black Friday kicks into gear.
I don't believe Black Friday will be a huge event, this year. It is declining in importance as a result of online deals that are spread out throughout the year and consumers' desire to wait to the last minute and have something shipped within two days via UPS. So, we could get some mixed results when Black Friday sales data begins to trickle in, next Sunday evening, which could weigh on sentiment even more.
Target (TGT): It was very disappointing to see the stock sold on Wednesday simply because web sales slowed to 20% growth instead of the company's aggressive, 40% long-term growth goal. I spoke to Target management yesterday; there is nothing fundamentally troubling in its web business or bricks and mortar business. Sure, the website is in perpetual improvement mode -- as are most retail websites. But, the online sales slowdown was driven by sluggish demand for winter apparel and price deflation in TVs (watch how this impacts Best Buy's quarter this morning). Importantly, when cold weather developed in certain parts of the country, consumers bought the company's apparel offerings strongly online and in stores.
The company is a winner for multiple reasons:
- It just had its expectations for the holiday season lowered by the antsy stock market, despite the quarter shaping up to be quite solid.
- Under the radar, the company disclosed it will be remodeling 25 stores in Los Angeles after the holidays to include new food layouts, giving it a nice narrative to share with investors early next year. A test store in Chicago receiving the food remodel has been very well received
- CEO Brian Cornell gained further credibility, delivering a quarter that outperformed mall-based retailers and larger rival Wal-Mart (WMT).
Foot Locker (FL): The stock has been dumped with the rest of retail, but as I noted recently, the selloff has not been warranted. I like what Dick's Sporting Goods (DKS) had to say about demand for athletic footwear -- namely that it was strong in the quarter even as interest in winter apparel was tepid, at best. With limited exposure to boots and a store full of new Stephen Curry kicks from Under Armour (UA) and new Jordan offerings from Nike (NKE), I think Foot Locker deserves a second look before the holiday season commences.
Home Depot (HD): I know what you are thinking: The company beat on earnings again and posted a silly strong 7.3% increase in U.S. comps for the third quarter, what could possibly be wrong? Well, unbeknownst to many, Home Depot slipped a line into its earnings call about how demand may be hit this spring due to a lack of winter-storm activity. Remember, a year ago much of the country had to reinvest sizably to rebuild lawns and home exteriors following a brutal winter.
Home Depot should have a good holiday season, but that was priced in six months earlier. What I am concerned with now is if the market grasps what could potentially occur in the first half of 2016 if winter never truly arrives.
V.F. Corp (VFC): During frequent channel checks this month, it has been encouraging to not see North Face jackets and apparel on sale. Ditto Timberland boots. However, I think the discounts are about to appear, and they may be deeper and more prevalent than Wall Street expects -- and V.F. Corp has guided to. Dick's Sporting Goods made pertinent comments on how it was shipping back excess winter goods to vendors due to slow sales, canceling orders altogether, and asking vendors for markdown support to move the stuff presently on the sales floor. Seeing as V.F. Corp. remained very optimistic on the holiday season, there could be risk to current consensus forecasts.
Under Armour (UA): As V.F. Corp was potentially too bullish on the holidays, so was Under Armour. The company downplayed the impact of warm weather, noting it has weatherproofed its business with a focus on selling lightweight jackets and fleeces. Wrong. Under Armour is likely to see margin pressure as wholesale accounts, such as Dick's, ask it for markdown support and cancels orders. I am not sure Wall Street has factored that in, yet.
Kohl's (KSS): No idea why the market embraced Kohl's earnings report. I think Kohl's is one of the most overvalued names in the entire retail sector, made so because of this perpetual notion it will be purchased by private equity. The company is a consistent letdown, and led by management that spews hope -- but rarely delivers. Why the company is a loser this week is fairly straightforward: Target is absolutely crushing it in apparel, and has been for the past three quarters. The assortments are on trend, and they are being presented well to consumers on new mannequins (which matters in the selling process!).
I think Kohl's will have to be more promotional than it wants to in the fourth quarter to compete with Target in apparel and in cosmetics/home with J.C. Penney (JCP) -- which is performing nicely in both categories.
GNC (GNC) and Vitamin Shoppe (VSI): One thing made abundantly clear from the results of Target and Wal-Mart is that people are buying their vitamins, protein bars and protein jugs from mass merchants instead of specialty retailers such as GNC and Vitamin Shoppe. Kudos to both Target and Wal-Mart for greatly improving their selection of health and wellness offerings. While GNC and Vitamin Shoppe will always get the hardcore workout person (such as myself) because their offerings are superior in many areas, the ability of Wal-Mart and Target to capture the average person -- who hits the gym 3x a week and enjoys whole wheat pasta -- is a negative to the specialty shops.