It's going to be a week of retail as many of the big names report earnings for the second quarter. Facing down some rather bearish sentiment created by Macy's (M) less than likable earnings last week, it will be interesting to see whether the weak performance was shared by other names.
Home Depot (Aug. 20)
Perhaps one of the biggest names in the stock market related to housing, Home Depot (HD) , is an interesting stock this week. As with last weeks' reporting from Walmart (WMT) , I'd imagine many an investor will be watching Home Depot this week to get an informal view on how the real estate market is faring. Are consumers putting money into their homes?
I've been cautious on my views when it comes to HD over the past few years. The company has succeeded in establishing one of the most consistent trends of revenue growth that we've ever seen. Year after year, we see 6%-7% growth in annual sales revenue. The rate of growth when it comes to net income has been even more impressive. That said, Home Depot's balance sheet provides a counter lever that many should keep in mind. As of April, Home Depot was running a deficit on the balance sheet of $2.14 billion in total equity. This has been a factor in many stocks lately that I view as a significant risk factor. Indeed, Home Depot has a lot of debt. Seemingly every quarterly report involves an increase in those long term liabilities that I fear could plague the company were things to slow down.
I remain a bit squeamish on HD, as the stocks struggle to find a clear bull run toward $240 shows that it's going to take some really strong news to make it happen.
Kohl's (Aug. 20)
Kohl's (KSS) is reporting in the rather ominous wake of Macy's quarterly earnings report last week. I had been rooting for Macy's, but sadly I think a fair amount of cognitive bias was present in my hopes. The retailer reported weak figures, prompting a selloff in many retail names, including Kohl's. Was Macy's poor quarter a strong barometer for what we're about to see this week in retail?
Kohl's has managed to keep its revenue streams rather stable through the past five years, while producing volatile (but positive) earnings annually. With a dividend of over 5%, KSS has remained an tempting name. I like the company's attempts to drawn down its debt, while initiating partnerships with Amazon (AMZN) to manage in store returns for the e-Commerce giant. When someone is beating you at your own game, it never hurts to partner with them. With a strong balance sheet, Kohl's needs one thing, rising same store sales. After last week's fallout, an upside surprise could lead to some nice trade potential.
Target (Aug. 21)
Target (TGT) falls into the same theme on retail this week, but has a slightly broader array of inventory. Analyst estimates have the retailer reporting $1.62 per share. That would mark an improvement over last year's $1.42 per share.
In the first quarter of the year, Target reported comparable store sales growth of 4.8%. Traffic grew by 4.3% during the quarter. That was an excellent start to the year for Target. Moreover, their digital sales were very strong, growing 42%. In a way, the first quarter might have created a bit of pressure for Q2. Q1 earnings increased 15.1% year over year to $1.53. Couple that with the solid comp sales growth, and you have a measuring stick that Target might be pressed to match this week.
It'll be very interesting to see what TGT does. My guess is market reactions will center more on comp sales growth and digital expansion rather than earnings. The stock pays a nice dividend, and isn't overly expensive. Unfortunately retail is certainly at the front of many concerns over a recession, so bad news might confirm investor fears and cause a further slide. There's a definite balancing act here.
Dick's Sporting Goods (Aug. 21)
Another cheap retail stock with a lot to prove, Dicks Sporting Goods (DKS) reports on Wednesday. The last big name in sports retail, Dick's has been playing a game of trying to maintain its sales, while working on finding ways to reinvent itself in an era of intense online competition. Revenues did turn to a decline last year, but it was a marginal 1.79%. The company has kept net income strong, and through share buybacks has kept earnings growing on a per share basis.
My continued concern has been the reliance on buybacks to produce results for shareholders. Thus far, total equity has been unaffected by the spending. Long term, they need a different game. Same store sales need to gain traction. It's that simple. In the first quarter, same store sales were flat while full year guidance was upped on an earnings basis. Obviously higher earnings are always welcome. But mark my words: the market is going to be watching same store sales. The company has worked very hard to drive efficiency. They're producing higher gross profits from what are basically flat sales figures. That's very good, and if they can somehow spur that growth story, there could be a lot of value here.