The overwhelming consensus is that the holiday shopping season began with the vigor of Santa sucking down five cookies and a glass of milk before he got to work. Data from every corner are all in agreement: The consumer maintained his or her pattern of spending when enticed by percentage-off signs in the windows and Facebook ads, and the calendar says buying stuff is a necessity.
In my opinion, Black Friday was a quadruple win for retail, as traffic was strong, conversion was strong, self-gifting rose, and online played a pre-Cyber Monday role.
Amid the merriness that is likely to inject life into the badly beaten-up retail space, I have to once again be the one to bring the reality check to the table. The key reason for the selloff in retail stocks into Black Friday (and by "key" I mean specific to the sector and not a function of headlines from Europe) is that the downside risk to operating margin, from steep promos and intensified marketing efforts, remains intact.
Movement higher in the stocks today only suggests that operating margin risk due to much-better-than-expected revenue is not as great, but that's a long way away from saying it has been completely removed from the investing equation. Be careful of getting swept up in countless third-party surveys, as it should be obvious that not every single retailer benefited equally.
For example, electronics such as televisions, video games (including the now-legendary Xbox bundle) and tablets were big-time sellers in stores and online, and these are categories that RadioShack (RSH) is far from dominating. If the National Retail Federation had said that consumers were snapping up cellphones with reckless abandon, then RadioShack would be a name to spy, but alas, I did not hear those sweet nothings.
Wal-Mart (WMT) customers were loading basic apparel into their shopping carts, so HanesBrands (HBI), whose stock had a selloff in plain sight, is of interest. The company has 26% of its sales leveraged to Wal-Mart and may partake in stronger-than-planned first half 2012 reordering from its largest customer and, as the year progresses, lower cotton costs.
Channel checks by yours truly indicated that Abercrombie & Fitch (ANF) and American Eagle Outfitters (AEO) struck the right chords with consumers because of their aggressive promotions, while Pacific Sunwear (PSUN) actually had people in its stores on Black Friday, opposite the case a year ago. On the other hand, the promotions at Zumiez (ZUMZ) weren't too mouthwatering, and I believe the traffic was soft as a result.
Certainly, not every single retailer partakes in the usual slash-and-burn pricing strategies that are reserved for Black Friday. Lululemon Athletica (LULU) is one such company that stays true to its belief that it sells the customer an unmatched experience and product and that the offering of a promo is blasphemy. Fair enough.
But when I see Black Friday 2011 start on a strong note as consumers were influenced by promos and marketing, sporting goods were a standout category (likely at Dick's Sporting Goods (DKS), which is selling more yoga and training apparel by Nike (NKE) and Under Armour (UA)), and prices on Lululemon items are sufficiently above last year's as if to be a deal breaker, I have to wonder about the real potential for disappointment in the fourth quarter. The company has to deliver the goods seemingly every quarter for the next five years, as analysts have jacked up their earnings estimates, valuation is at eye-popping premiums relative to peers, and the Street may be a bad quarter away from shifting to a neutral stance on the stock (in other words, downgrades that hurt the stock could ensue).
For these reasons, I am cautious into Lululemon's third-quarter earnings release on Thursday, Dec. 1, where holiday quarter guidance will also be issued. When any stock is down 20% in four weeks and has a beta approaching 3 in these market conditions, every piece of short-term news had better be good. I can't say that confidently about Lululemon.
