5 Winners and Losers in the Retail Sector

11/14/2014 7:00 am EST

Focus: COMMODITIES

Even though the mood regarding retailers is good headed into the busy holiday season, Michael Fowlkes, of Market Intelligence Center, points out there are still going to be some retailers that struggle, despite all the upbeat forecasts regarding the sector as a whole.

Most sectors have already enjoyed their time in the spotlight this earnings season, but one that has yet to really take center stage is the Retail sector (XRT). Now is a crucial time for retailers, with the holiday season upon us, so Wall Street will be paying extra attention to third-quarter reports that are about to occur.

Some big names have already released the results of their most recent quarter, but industry heavyweights such as Target (TGT) and Costco (COST) have yet to report. These are the companies that can really tell the tale of what is happening in the sector and will provide some good insight into the health of the overall economy and consumer sentiment.

Overall, the mood is good regarding retailers headed into the upcoming holiday season. Analysts expect retail sales to rise around 4.1% from last year, which should lead to strong numbers for most retailers, but as evident in the limited number of retail earnings reports we have see thus far for the third quarter, things may not be as good as everyone believes. There have been some mixed results, which signals that some retailers will benefit from a strong holiday season, while others may be forced to offer deep discounts and promotions to get shoppers in their stores.

Of course, the deeper the discounts, the bigger the impact they have on gross margins and consequently earnings, so investors should be aware of the fact that there are going to be some retailers that struggle this holiday season, despite all the upbeat forecasts regarding the sector as a whole.  Let's take a closer look at five retailers that have already reported their numbers for clues as to what to expect from the rest of the sector moving forward.

Macy's

Department store chain Macy's (M) reported its third quarter numbers on November 12, and while the results were mixed, they were strong enough to send shares sharply higher. Quarterly earnings of 61 cents per share were up 23% from the same period last year and well ahead of the consensus 49 cents. Revenues were $6.2 billion, which fell short of the $6.35 billion estimate and down 1.3% from last year. Wall Street decided to focus on the earnings beat and drove the stock up 4% the morning of the announcement, despite the revenue miss. I can understand why traders would focus on the earnings beat, but what I find troubling in the report is that Macy's actually lowered its fourth quarter forecast. The holiday season is crucial for retailers and seeing a big retailer such as Macy's cut its forecast should have resulted in alarms going off, but instead the stock moved higher. With the lower forecast, I would be apprehensive about the stock at the current time. Sales were down and, obviously, the company expects a rough fourth quarter. With shares trading higher following the report, I would use that strength to lock in some gains and definitely would not look to establish a new position at the current time. With sales being weak last quarter, and probably this quarter as well, Macy's will likely use deep discounts and promotions to boost sales figures this holiday season, which is going to squeeze its margins and result in lower earnings. The same may be true for its competitors, such as Dillard's (DDS). There are better plays in the retail sector at the current time.

M Daily Chart

chart
Click to Enlarge

NEXT PAGE: Two More Retailers That Reported Results

|pagebreak|

Lumber Liquidators

Lumber Liquidators (LL) reported rather disappointing third quarter results on October 22. Earnings were $0.58 per share, sharply lower than the $0.68 analysts had forecast. Revenues of $266.1 million also fell short of the consensus, which stood at $273.3 million. The encouraging part of the report was that net sales rose 4.6%, but other than that, there was little to cheer about in the results. Comparable same store sales, which are a much better metric to gauge a retailer's health, were down 4.9%. In addition to the weak numbers, the company also lowered its full-year guidance. The results indicate that people are less willing to make big dollar expenditures on their homes at the current time, which could be viewed as a negative for all retailers. Home Depot (HD) and Lowe's (LOW) have yet to report, but so far both of those two stocks have been strong performers this year. I expect decent reports from those companies, but there is an outside chance that their results could be weighed down by homeowners not being so willing to put money back into their homes at the current time. Home Depot and Lowe's is different than Lumber Liquidators in the sense that home improvement projects that originate in their stores do not have to be so costly and they also do a lot of business directly with homebuilders and contractors. I would not draw too close of a connection between Lumber Liquidators and traditional home improvement retailers, but you could argue that consumers in general are not willing to buy discretionary items with high price tags at the current time. This may result in negative earnings surprises from companies such as Tiffany (TIF), which reports on November 25 and could signal upbeat numbers from companies that offer lower-cost items such as Wal-Mart (WMT) and Target TGT, who are scheduled to report on November 13 and 19 respectively.

LL Daily Chart

chart
Click to Enlarge

Nike

Athletic clothing and accessory retailer Nike (NKE) is riding high following its fiscal first quarter report back in September. The company outpaced analyst estimates on the top and bottom line, shooting shares to an all time high, which it has steadily built on since the report. Net income was up 33% and revenues rose an impressive 8%. Nike's results illustrate a shift in style in the US to “athleisure,” a term that describes clothes that are designed to fit both athletic and leisure situations, such as yoga pants and sweatshirts. The take-away from Nike's report is that investors should seek out retailers that thrive in the sporting goods sector such as Foot Locker (FL), and perhaps be cautious of companies such as VF Corp. (VFC), which has brands such as Lee and Wrangler.

NKE Daily Chart

chart
Click to Enlarge

NEXT PAGE: What Do the Last Two Retailers Say?

|pagebreak|

Bebe Stores

Apparel retailer Bebe Stores (BEBE) sells a wide range of women's apparel and accessories, and posted a smaller than expected fiscal first quarter loss on November 6. The stock has been trending lower for the better part of 2014, but the better than expected report resulted in a slight bounce and shares are now moving in the right direction. Net sales in the quarter were off by 6.5%, but a lot of that drop can be tied to store closings as the company shifts focus to its better performing locations. I take a rather neutral view of the company on its quarterly results. While it is always a good sign to see earnings come in above the consensus, the retailer still has an uphill battle to get back into the green. It is hard to read too much into the sales drop since the company has been closing stores, but Wall Street has decided to focus on the earnings beat, driving shares higher as a result. The company is illustrating that management seems to have a decent handle on the overall business and appears to be making the right decisions to get things back on track. It is still a high risk stock, but it does show that Wall Street is willing to buy into retailers that show an ability to improve and is willing to overlook negative earnings by struggling retailers as long as quarterly results come in better than expected.

BEBE Daily Chart

chart
Click to Enlarge

Amazon.com

E-commerce giant Amazon.com (AMZN) reported its third-quarter results on October 23, disappointing investors with weaker than expected earnings and revenues during the quarter. Wall Street has grown tired of waiting for Amazon's massive R&D investments to pay off and the earnings miss sent shares sharply lower. In years past, investors were happy to overlook weak earnings due to strong belief in the direction the company was moving, but Amazon has been in investment mode for several years now and shareholders would like to see some earnings. The encouraging part of the report was that sales were actually up 20% versus the same period last year. Revenues of $20.58 billion were slightly lower than expected, but the 20% year over year jump was still impressive and a big reason why the stock has since made back most of its post-earnings drop. However, the company's holiday forecast raised some concerns, with a forecast for 7% to 18% sales growth in the fourth quarter. This comes after five straight quarters of 20% or greater growth estimates. While the results were not very positive for the company, if you focus solely on the impressive sales growth, you could easily view the results as a positive indicator for retailers in general.

AMZN Daily Chart

chart
Click to Enlarge

By Michael Fowlkes of Market Intelligence Center

Related Articles on COMMODITIES