This week is going to be big for retail.
Three popular names are reporting earnings. Two are popular for their attempts at surviving the retail Armageddon, the other for not doing well at all.
Being a staunch supporter of bricks-and-mortar (I like seeing things before I buy them), I've been rooting hard for Best Buy (BBY) . The retailer is one of the few names that has managed to maintain strength in the wake of a tumultuous retail environment.
After experiencing a few years of sales declines, Best Buy found renewed growth over the past year. For the first nine months of fiscal 2018, Best Buy's revenues were up 4.8% to $28 billion.
In its earnings report this week, the company needs to show a shift in operating income. Those margins have suffered as the company's expenses increased in a push to drive sales. That dynamic is OK for a while, but it has to be adjusted at some point. Otherwise shareholders are reliant on lower taxes and share counts in order to see higher earnings, regardless of sales growth.
That was the certainly case through the first nine months of the fiscal year. Pretax income was down to $916 million vs. $944 million the year before. The benefit of a lower overall tax rate allowed for 14.6% higher net earnings of $729 million. The benefits of those net earnings to shareholders also stemmed from a substantial 8.7% decrease in diluted shares outstanding.
This earnings report needs to show that Best Buy can create earnings without the aid of taxes or share buybacks, which drive up debt. We need to see operating margins go up, as well as continued sales strength.
Best Buy reports earnings on Feb. 27.
This is an important quarter for Macy's (M) . Through the first nine months of the year, the company succeeded in keeping sales growth positive, if only slightly. Prudent cost management has kept operating income growing at an 11% clip to $688 million.
To grow net income by 68% in the first nine months of the year to $358 million ($368 million with noncontrolling interest) is no small success. That takes work. That represents a 66% increase on a diluted earnings basis. Unfortunately, Macy's still has a lot to prove.
The time-honored retailer has to demonstrate that it can not only stand up to the new retail world, but also thrive in it. Macy's same-store sales cannot disappoint; and its digital space needs to continue to expand.
One of the avenues that I've always felt Macy's should pursue harder is the potential of its real estate. Rather than selling it off as a short-term move, the company should try to monetize it through leasing. Macy's has some serious value in its properties, and the company could be as much about real estate as it is retail.
In this week's earnings, I'll be looking to see a continued extinguishment of debt, along with comp sales growth. Based on the way markets treated this stock through 2018, I think investors are going to be very critical of even good results.
Macy's reports earnings on Feb. 26
Boy I wish I had some put options on this one. Depending on what J.C. Penney (JCP) stock does after earnings, I still might get some.
Regardless of how this next earnings report turns out, I am extremely skeptical that J.C. Penney can make a successful long-term turnaround. The liabilities here are just too high, and the company doesn't have the scale anymore to cover the spread.
I can't remember the last time I actually saw a J.C. Penney with appliances, but the fact that the company is ditching them from its stores altogether cannot be a good sign. The retailer has talked a lot about plans to recreate itself to focus on things like women's makeup and toys (not awful ideas considering makeup or perfume might be something less likely to be purchased online), but it feels like too little too late. Meanwhile, J.C. Penney has an impressive amount of debt, and is not creating the cash needed to level it out.
Revenue is down 5.8% for the year, and it doesn't sound like the fourth quarter is going to help. If it does, we might see a bump in the stock over the short term. That would be all about beating estimates. I'm interested in real gains.
Operating income has not fared any better; dropping roughly 100% to a loss of $133 million over the first nine months. The only saving grace for the company has been a slight improvement in net losses, which were 8.3% better so far this year at $330 million.
To me, the debt levels associated with JCP have already sealed its fate. The retailer had long-term debt of more than $4.1 billion at the end of the third quarter. Unless we see positive earnings, I don't think that number will improve much.
Even if the company does pay down the debt, what will they have to innovate with? They can't revamp the business while also paying off that debt load. It's a tough spot.
This might be a trader's delight, but it is not a good investment unless you want to short it. If the company reports better-than-expected results, we could see a spike. I'm strongly considering some 2020 put options if that happens.
J.C. Penney reports earnings on Feb. 28.