The malls were a breeding ground for all sorts of thoughts on investing and the U.S. economy this past weekend.
Most retailers, based on my findings, got off to a slow start on both Super Saturday and Super Sunday. But, then, the stores came alive amid mouth-watering deals on apparel, accessories and select electronics. I am a little concerned on how gross margins have taken shape for retailers this season. The prominence of the around-the-clock deals online and 50%-off-plus signs in stores are surprising in light of the plunge in gas prices. It almost seems as if retailers don't trust that consumers will spend their gas savings and are inclined to move as much volume as they can before the books close in January.
But I will say my concern on raw gross margins for retailers is tempered by the volume I think these companies have been able to get out the door. Racks are nicely picked over and, actually at many stores, top styles and brands are simply not in stock. Looking back at my notes from last year, this was not exactly the case.
Here are some views based on questions I received this weekend.
Foot Locker or Finish Line?
I have been concerned with Finish Line (FINL) ever since coming off its second-quarter earnings call. A host of things are not working for the company, notably apparel and, oddly, certain lifestyle sneakers the company took inventory bets on. The operational fumbles are detectable in looking at Finish Line stores compared with Foot Locker (FL). The latter has a tighter apparel assortment, basically items the consumer at a Foot Locker would purchase. Finish Line's apparel assortment, on the other hand, is minimal in terms of selection and a bit too sports focused.
Foot Locker is the play here as it's clearly the share gainer, while Finish Line's inventory issues are unlikely to correct until mid-2015. Frankly, I would like to see these two companies merge, similar to what is happening between dollar stores Family Dollar (FDO) and Dollar Tree (DLTR). There could be some nice cost savings in a combination such as this, with savings being reinvested in taking the Foot Locker (Finish Line phased out over time) brand international in the form of large flagship stores in top international markets. Hey, it's just a dream.
J.C. Penney or Macy's?
The downdraft in J.C. Penney (JCP) shares since CEO Mike Ullman issued a very positive update on the start of the holiday season (Black Friday) has been alarming. Although the assortment at J.C. Penney has looked great, and well picked over (especially in athletic wear and home), I think the market is concerned about what the company is doing to drive sales. Hence, it's positioning for the company reducing its long-term guidance ranges for 2017 that it shared on its NYC analyst day a couple months ago. If those targets are reduced, we now have J.C. Penney back in the crosshairs of a market expecting it to go out of business.
I want to say nibble at J.C. Penney here, but am not inclined to go against the market. Should we receive another positive update from Ullman in January, then buying the stock would be of interest. As for Macy's (M), I am on the concerned side with them as well. The discounts on Coach (COH) and Michael Kors (KORS) handbags and excess denim and sportswear have seemed a bit elevated. So, avoid the department stores and ponder a stock like V.F. Corp (VFC). The winter hasn't been frigid, but per the usual V.F. Corp merchandise is holding its price quite well against a sea of discounting.
Home Depot or Lowe's?
Wall Street has fallen in love with Lowe's (LOW), positioning ahead of the holiday earnings report in February on expectations for same-store sale acceleration and strong 2015 guidance. I get it, but let's not forget about Home Depot (HD). Sure, there is a new CEO, but he is rock solid, as is the executive team. The culture is strong. And the stores are being improved and better integrated with online. I believe Home Depot comes out and issues a big hike to its capital allocation (share buybacks/dividends) plan early in 2015. It's no longer opening stores, so free cash flow is getting plowed right back into the business and into the pockets of shareholders via dividends and buybacks.