Macy's, Inc. (M) started off a big lineup of retail earnings with relatively uninspiring results.
Earnings beat estimates, but declined year over year.
This week, we're going to get some insights into names that have performed better, and some that are really struggling.
Home Depot (May 21)
Down from all-time highs, Home Depot, Inc. (HD) is a company that has balanced growth with rising debt.
The king of home improvement has put together quite a track record of revenue gains through the past few years. You'll be hard pressed to find a company with better growth consistency over the past five years. On the other hand, there is the ever-present discussion about how deep we are into the economic cycle.
Housing prices have shown weakness at different points, and I have to wonder whether it's wise to own stock in a company dependent on renovations and housing developments in order to grow its revenue stream.
Home Depot also has a lot of debt. With $26.8 billion in long-term debt on the books at the end of December, Home Depot was carrying a deficit for total equity on the balance sheet.
It will be interesting to see whether earnings continue to justify that imbalance in assets.
J.C. Penney (May 21)
I have kicked myself for a month over not shorting J.C. Penney Co., Inc. (JCP) earlier this year when it reached the $1.60 range.
Ever since the Sears bankruptcy, I have viewed J.C. Penney as the most likely candidate to bite the bullet within retail.
Now trading at around $1.15, I think investors took note from Macy's earnings, and are getting cautious about what it means for a weaker performer like J.C. Penney.
Sales are plain old stagnant, and J.C. Penney has failed to derive any sort of meaningful profits from them. To me, the debt levels here are too much for the retailer to overcome. J.C. Penney managed to report $75 million in net income in the last quarter, but outside of the holiday seasons, the retailer doesn't seem to be able to make any money.
Year over year, their holiday profits shrunk from $254 million to $75 million in the fourth quarter of 2018.
To me there's not enough room to innovate.
J.C. Penney has constantly been plagued by needs to reduce debt, while closing store locations. The company had $109 million in cash on hand at the end of the fourth quarter, with $333 million in cash/equivalents.
My fear is two bad quarters could cause J.C. Penny to shift from attempting to decrease its debts, and raise cash. There's simply a lot going on for the stock.
I wish with all my heart that I had purchased some 2020 put options back when it was trading at $1.60.
Kohl's (May 21)
Shining a light on the good side of retail is Kohl's Corp. (KSS) .
Perhaps my favorite name in the sector (other than perhaps Target (TGT) ), Kohl's has managed to reduce its debt load while maintaining strong revenues/earnings.
Much like other names, it has only managed to maintain sales and profitability in recent years. It hasn't really grown them. Taking new initiatives of late that involve accepting Amazon (AMZN) returns at is stores, I'll be very curious to see whether Kohl's made any moves ahead of the competition in the first quarter.
Their 4% dividend sure is pretty.
Best Buy (May 23)
Best Buy Co., Inc. (BBY) is the last real name in bricks-and-mortar retail electronics.
Because of that, Best Buy has a bit of a moat in terms of competition. The retailer's adversaries are all online, an area where Best Buy has been expanding.
After finding renewed revenue growth in 2018, Best Buy had a bit of a sales slowdown in fiscal year 2019. Comparable enterprise sales grew 4.8% versus 5.6% in fiscal 2018. They're projecting non-GAAP full-year fiscal 2020 earnings of $5.45-$5.65 per diluted share.
That would mark small but consistent growth over fiscal 2019's $5.32 per share.
At $68.93, Best Buy is trading at 13.3x trailing GAAP earnings of $5.20.
Overall, I think the stock is fairly priced. Moving forward, one has to wonder how the current trade disputes and subsequent tariffs play into Best Buy's future.
Considering the amount of involvement tech has with Chinese trade, Best Buy might suffer from pricing issues if things like TVs and phones get increased pricing.
On the other hand, prices might remain steady and manufacturers and retailers might eat the cost, resulting in decreased margins.
