Retail -- the one area of the market that didn't get crushed last week -- offers some hope that the world is not ending, as many fear mongers are pitching right now.
Outside of the earnings-related disaster that was yoga apparel maker Lululemon (LULU), shares of retailers held up very nicely, last week. Nike (NKE) continued to outperform the Dow Jones Industrial Average and S&P 500. Starbucks (SBUX) stayed firm.
It's good to see these best-in-breed names -- companies that have killed it this year in terms of earnings -- defy what was volatile trading conditions last week and an uptick in fear. If the market, and economy, were totally falling apart, these winners, in an always-risky sector such as retail, would be high on the list to be dumped to raise cash or wade into more defensive equities. In fact, the Market Vectors Retail ETF (RTH) has been on an impressive run since the holiday shopping season kicked off on Thanksgiving Day. What intrigues me is that the bullish move since Black Friday for the sector has occurred despite the prolonged warm weather, which is keeping discounts high.
The market is speaking, and it's saying that the U.S. consumer is spending more this holiday season than expected. I think that notion was lost with Friday's retail sales report: the core sales figure was solid. While discounts in the apparel stores are elevated, it would appear that consumers are absorbing the inventory without retailers having to completely give product away. Consumers aren't buying a ton more, relative to their budgets, but enough to suggest the market's action last week, and the general fear out there, was a bit overdone. After all, we remain a consumption-driven economy.
A trap door opens and major indices fall right through, except shares of retailers. Source: Yahoo Finance
Here are a couple general observations from retail over the past two weeks:
- Sales of toys are poised to surprise in terms of their strength. Although Star Wars toys continue to be on the shelves (which may explain why Hasbro (HAS) shares have lagged in the past month), the racks are being nicely picked over. Stores, based on my checks, have been well-trafficked on the weekends and the weekday evenings, after work. A couple of weeks ago I suggested rotating out of Hasbro and into Mattel (MAT). I would stay the course on Mattel at least until Christmas, it should be a profitable position as of today.
- Shares of Wal-Mart (WMT) have seen an interesting move higher since Black Friday, and are outperforming the Dow. Here is the problem: I think it has been a defensive move by people who continue to forget Wal-Mart is doing horribly on the top and bottom lines. I think Target (TGT) is having a very solid holiday season, much better than Wal-Mart in terms of online sales growth, apparel sales and home goods sales. Moreover, Costco's (COST) quarter came in just fine, to me - likely at the expense of Wal-Mart's struggling Sam's Club division. With Target showing weakness lately, I would give it another look.
But, perhaps the largest surprise of late is how shares of J.C. Penney (JCP) have fallen off a cliff in the past month -- to the tune of about 17%. I talked with J.C. Penney's CEO Marvin Ellison on Black Friday, and he sounded generally upbeat on how the season began. Given my experience covering Home Depot (HD) when Ellison was there on the executive team, I take him at his word. Indeed, I believe he is a person of good character.
I am obviously not basing my J.C. Penney optimism entirely on the CEO. In my opinion, J.C. Penney is winning the post-Black-Friday holiday season from Macy's (M) and the corpse that is Sears (SHLD). I am seeing good out-of-stocks in women's shoes at JCP. Keep in mind, women are the first to pull back when the economy is beginning to weaken -- they take one for the team (family), and forego a new dress for themselves to outfit little Jenny. I am not seeing that pullback happen, which might justify the market's fears that the economy is in shambles and can't handle higher interest rates. Winter apparel has finally started to move. Kids apparel is doing surprisingly well at J.C. Penney: some stores look quite lean on inventory. And the company's Sephora cosmetics stores continue to be packed (as does Ulta (ULTA)).
If I was still a stock analyst, I would have issued a note this morning upgrading JCP to a strong buy. It's time the market gives J.C. Penney some respect, and I would be looking for that to happen headed into the new year.