Once again, the week ahead will be a big one for retail stocks. We saw names like Macy's, Inc. (M) and J.C. Penney Co., Inc. (JCP) report this week. Next week will include quite a few competing retailers.
Kohl's (March 5)
Over the last five fiscal years, Kohl's Corp. (KSS) has done remarkably well at maintaining a profitable business with stable revenues. Considering the brutal onslaught that Amazon.com, Inc. (AMZN) has put on many retailers, it's an impressive feat. In their last quarterly filing, Kohl's total revenues were up 2.9% in the first ninth months of the fiscal year. Net income was up 35% through that same time frame to $529 million. Kohl's needs to maintain that earnings growth while also invigorating sales. There is very little wiggle room for mistakes in retail right now. If a company underperforms expectations, the stock gets punished. Conversely, the players doing well have significantly nice bumps to the upside on good news. These fourth quarter results will set the tone for Kohl's in 2019.
The retailer reported that they had comparable sales increases of 1.2% in the months of November and December. It might not sound like much, but in this environment, I'll take it. Kohl's has done a good job of translating its sales growth into meaningful earnings. I'll be curious to see how those two months translate in the fourth-quarter results. I'll also be eager to hear about how their partnership with Amazon is faring in terms of increasing traffic. Carrying out Amazon returns at Kohl's locations is a win-win. I think it has the potential to really draw consumers into Kohl's stores.
Target (March 5)
Another retail player, Target Corp. (TGT) has a lot to prove as well. Bouncing back from a slowdown in 2017, Target has done well to regain sales and earnings momentum. Target reported comparable sales growth of 5.7% in November/December. Based off of this, I expect Target will likely be the one to really shine next week in terms of retail earnings. Through the first nine months of the year, Target's revenues are up 5.4% year over year (on an adjusted basis). The payoffs from that revenue growth have been strong. Earnings are up 17.1% to $2.14 billion, while earnings per diluted share are up 20.5% to $3.31.
I expect Target will successfully create the same type of earnings growth from the gains in holiday comp sales. Something of note that should not be overlooked is how much of an impact lower taxes have had on Target's income. When you compare their pretax income growth to earnings growth rates after taxes, it's clear this has been a major part of retailer's successes this year. I do worry that it could set a bad marker for next year when the change in taxes is no longer pronounced, and percentage growth rates will be reliant on operating margins. This is a caution I've been putting forward about many retailers' earnings.
The announcement that Target has started its own online marketplace for the third party sellers is only going to intensify the competition between the big-name retailers. It's good to see Target getting into the fray. The big thing I'll be looking at closely next week is operating income. TGT's operating income was down 3.3% in the first three quarters. I'd like to see an improvement there.
American Eagle Outfitters (March 6)
I'm not a customer, but I'm giving American Eagle Outfitter', Inc.'s (AEO) stock a good, hard look. This stock has some nice trends for the price. Over a fiscal five-year period, sales revenue has trended up, while profitability has been solid.
The company provided a fourth-quarter update on Jan. 14, stating that comp sales for the quarter were up 6% to that date, while reiterating guidance of 40-42 cents per share. I was very encouraged by the company's third-quarter results. The company reported comp sales growth of 8%, with a 33% increase in earnings per share to 48 cents. What's not to like about that? If fourth-quarter guidance holds true, the company should close out the year with roughly $1.46 in earnings per share. That would mean the stock is trading at around 14x earnings. Estimates for next year are around $1.63 in earnings per share. If AEO can report any surprises, I think this stock is a prime candidate for growth.
Rather than saying American Eagle needs to report something wild for the fourth quarter, I'd say the company needs to just not report bad news. I like their financial statements. Revenues are growing. Earnings are improving, and the balance sheet is nice. The growth story just needs to keep happening. Overall, I really like what this company is doing.
Amazon and Kohl's are holdings in Jim Cramer's Action Alerts PLUS Charitable Trust Portfolio. Want to be alerted before Cramer buys or sells these stocks? Learn more now.
