Wednesday, December 31, 2008
It's been a year where we've seen stupidity and incredible hubris revealed, resulting trials in the markets and financial companies, rather interesting and unexpected events unfolding themselves in local financial companies, and health challenges for some very dear friends of mine. Through it all, I've been blessed in ways I couldn't have possibly imagined. Even so, I'm ready for a continuation of the new that is underway.
Cheers everyone. Let's make some money in 2009, shall we?
One look at this graph, combined with the knowledge that it is more and more difficult to get a mortgage (i.e. refinance some of these beasts), should make you rethink any rosy scenarios you might be harboring in your heart. Oh yes, and I hear that as many as 50% of the mortgages that reset in 2009 are already behind on their payments... at the teaser rates. Want to bet on a fabulous 2009? I'll take the other side of that bet!
It's not over until the fat lady sings, and she's not even starting to warm up yet.
Tuesday, December 30, 2008
"Every party has a pooper, that's why we invited you, Party Pooper."
I'm finding that this is a role I'm taking on more and more lately. It's not that I enjoy being a wet blanket, really. I'm actually quite fun to be around, as long as we're not talking about the economy. So, what's set me off this time?
The International Council of Shopping Centers has recently released a report calling for 73,000 stores to close their doors during the first half of 2009. The first HALF. Six months. Not shocking to me or you, if you've been reading this blog.
In light of that, though, could someone please explain to me (using small words) how some of the portfolio managers on television can possibly be excited about the market going forward? 73,000 store closings is a little bit more than a pebble dropping in the ocean. If you truly think about everything and everyone that goes into running a single mom & pop type shop, you will quickly realize that we're talking about a lot of unemployed people and lost GDP.
There are roughly 600 good malls in America. Obviously not all of the possible stores closing are in malls, but humor me for a minute. Let's say the average mall has 200 stores, which is probably high. So in my example there are 120,000 mall stores in my world... and 73,000 are turning up their toes and dying. Hmmm. That's not ugly. ::cough::
I'm all about the Darwinian evolution of retail. I have absolutely no problem with bad retailers failing. The culling of the herd is a good thing. What I have a problem with is folks not realizing that those failings will have an impact on the economy. The thought that one guy floated today (had I been more awake I would have noted his name, but it was early out here and I was suffering from a caffeine deficit) was that it was already priced into the market because these were the lowest valuations he'd seen in his thirty year career.
Here I go again, but just because it's the lowest valuations that you've seen in your career doesn't mean that it's as low as they go. A sense of history is important. And a realization that the past 10 years (or more) have been extraordinary times and valuations in the market is also rather useful. With all that the consumer is still facing, I just don't understand how anyone can believe that we're in for any sort of a rebound to recently normal valuation levels. While the US market has traded at roughly 14x earnings in recent history, the longer term valuation level is closer to 10x. And when the pendulum swings, it always goes past center in the other direction.
I understand the theory that you buy stocks before the end of the recession. Retail in particular starts to rally 6 months before the end of the recession. But given the landscape, I just don't see how we are out of this recession in 2009, which means that keeping powder dry is still in order for private clients. We're going to play this rally for as long as it holds, but I don't expect that to be longer than March. Trades to go to majorly defensive positions are going to be teed up and ready to go.
Monday, December 29, 2008
Given that I had a friend pick up a dress for $5.60 (that's NOT a typo) yesterday at a major retailer, perhaps that number is right.
Wednesday, December 24, 2008
But at the end of the day, it's not about the things you have, it's about the people you have. It's about the family, the friends, the memories you create, and the times you enjoy.
Take some time, enjoy your family, and remember that there's a reason for this season - and it isn't Santa Claus.
Merry Christmas to you and yours from me and mine.
Sunday, December 21, 2008
I usually laugh at weather as an excuse from retailers, but this time, I've got to commmiserate with them. I mean, even Las Vegas kids got a snow day this week! This week, this weekend in particular, is usually the biggest shopping weekend of the holiday season. And now what shoppers there are can't get to the stores.
I feel like I should bake some hot dishes for the retail wakes that are surely coming.
Friday, December 19, 2008
I'll be out in the malls this weekend again, checking the discounts. One of the concerns that I'm hearing is a dirth of gift card sales. I'm sure part of the reason for this is that you have to pay full price for gift cards... when you can get full 'gift credit' with your friends and family for a sweater bought at 70% off.
The rise of gift cards has helped to extened the holiday shopping season through January as folks redeem them for heavily discounted or new season merchandise. The worry now being floated is that a drop in gift card purchases will cause the holiday shopping season to end December 24th at 7pm. The stuff left after the last elf packs up Santa's bag on Christmas Eve will sell... but I have a feeling I'll see pricing on December 26th like I've never seen before.
Money saving tip of the day? Have your holiday gathering with extended family on December 27th... and do your shopping the day after Christmas.
Friday, December 12, 2008
Thursday, December 11, 2008
Back in July the discussion was all about inflation: food inflation, gas inflation. Remember that it was mid-July that gas prices peaked nationwide. Gas prices are now down 58% from that level. Fifty. Eight. Percent. Today on their first quarter conference call Costco confirmed that they are now also getting price concessions from suppliers on goods that had gone up significantly just a few months ago. While I want to be clear that they didn't specify where they are currently getting concessions, some of the major price increases had been for goods that used petroleum products (plastics, etc). You can bet those prices are headed down. In fact, it was a source of great pain for them that they had to take the price on their rotesserie chickens up from $4.99 to $5.49 to $5.99 all within the course of 6 weeks because of food price inflation. Guess what? They're back down again.
Gas, which was a source of huge LIFO charges because of inflation (if you want an explanation of how and why that accounting even exists, you'll need to find someone smarter to explain it), has now swung completely the other way. And whereas it was at best a teeny profit margin (perhaps even sometimes a bit of an unintentional loss leader) in July and August, it was for a bit of time these last few months 'wildly profitable' according to Costco. (Because they sell so much gas, they buy gas cheaper faster as the price is dropping, but can still stay at really cheap prices to consumers while their cost drops faster.)
There's been a lot of consternation about the huge amount of economic stimulus the government has been pumping into the economy in the name of stabilization, mostly because the great fear of further inflation. Eventually that may happen. Heck, look at what happen when they took interest rates down and flooded cash into the market at the turn of the century (see my August 2008 Post Modern fairy tale for more information). But I'm here to tell you, we can't see the whites of inflation's eyes from this vantage point. We'll remain vigilant. But in a really quick turn of events, we're much more troubled by the looming deflation at this point.
As I've said for awhile, the weaker retail hands are going to have to fold. The game continues, fewer players each round. A partial list of the dearly (and somewhat recently) departed:
- Steve & Barry's
- Linens & Things
- Sharper Image
- Lillian Vernon
- Whitehall Jewelry
- Circuit City
- KB Toys
There's more to come. I'd post it here, but then I'd be the subject of hate mail from management teams. That's no fun. Feel free to email me if you want to know my thoughts, though.Carry on. You probably won't even notice they're gone.
Sunday, December 7, 2008
Last week I watched so much financial TV that my head came close to exploding. The message, repeated ad nauseum, was that it's time to buy because things are so cheap and the recession must be close to over. Okay. If you think so. But let me give you a few things to think about before you bet your entire retirement account on black.
Yes, the last two recessions have lasted about 8 months. And yes, we're already 12 months into this little piece of recessional happiness. So, that means we're almost done, right? Nope. Why not? Keep reading.
Most recessions come from inventory build-ups. Think back to the year 2000. What tanked technology? All the parts everyone needed to build out the internet were in short supply, so everyone double/triple/quadruple ordered. And then the factories were actually able to deliver what had been ordered... and those who had ordered only needed a fraction of the stuff the other companies were trying to deliver to them. In other words lots of inventory, few corporate buyers. This usual scenario then leads to companies cutting jobs because they have to make less stuff. At this point, the consumer starts feeling the pain and cutting back... and we're almost out of the woods.
This time it's different. Really. It is. Let's look at this recession. Corporate inventory levels haven't been an issue, at least until recently. We got here differently this time. This time what fell apart first? Homes. Who owns homes? Consumers. So, instead of starting with industry and then having the issues filter through to the consumers at the end, we're leading with the consumer.
Let's review what Joe and Jane Consumer have had to deal with over the past couple of years:
- Their home has lost at least 15% of it's value... but more likely somewhere between 25-50% of it's value.
- Their retirement accounts have lost 40% or more of their value.
- The company holding their home equity loan has put the kibosh on further withdrawals.
- Their credit card companies have cut their credit limits and/or raised their interest rates... unless the darn things just got canceled outright.
- Gas and food prices went up astronomically. I'll give you that gas prices are now down at 5 year lows, but with their balance sheets evaporated and their credit essentially maxed out, low gas prices are nice but not enough to make much of a difference at all for the majority of U.S. consumers.
- Oh yeah, and then there was the (un)employment report last Friday. Worst in 30-some-odd years. Sure, employment is a lagging indicator. But it's still falling. And more companies are laying people off.
So, while Black Friday sales were up nicely and Cyber Monday sales were up even better, my interviews with consumers ... and my common sense... tell me that they're buying on deep deep sales when they buy. Holiday sales (oh, heck, can we just call if Christmas please?) are probably going to fall this year. Fall. That's not good. And it will have ripple effects throughout the economy.
Hmmm. Then there's the problems in Detroit. And the still-mostly-frozen credit markets. I'm not very political. But I've been impressed by what Mr. Obama has been putting in place for the future... and by his pragmatic approach to this whole mess. But I have a very strong feeling that around March or so everyone is going to figure out that he doesn't have a magic wand, he can't make it all better quickly... and this market is going to take another dive for the floor.
Remember, stocks are only cheap on a Price/Earnings basis if you know what the earnings are going to be. Forward P/Es are based on someone's best guess of the future. But if that future isn't getting better, it's getting worse, are you really sure about that valuation?
Enjoy this Santa Claus rally. Play it if you want. But don't stay too long at the party, 'cause despite the hair of the dog that everyone seems to think is yummy right now, the hangover isn't anywhere near done.
Tuesday, December 2, 2008
What I loved most was the commentary from management: “Given the current economic and retail environment, we will carefully evaluate alternatives that provide financial flexibility in the near-term, while enhancing shareholder value in the long-term,” said W. Bruce Johnson, Sears Holdings’ interim chief executive officer and president. “These actions may include additional store closings or divestitures, remodels or repositioning of existing stores, acquisitions, and repurchases of our debt and common stock.” (emphasis added)
Acqusitions. Lovely. If there's anyone I want to see buying up other companies in a retail environment like this, it's the retailer who can't manage their way out of a paper bag. Can you imagine the conversaation that must be flowing around that board room? 'The economy stinks. Our business stinks. We have major operational issues. Let's buy someone else and bring them into our muck and mire.'
I am giving them the benefit of the doubt here. I'm believing that they understand how badly the retail business stinks and that they understand that their odor is even more pungent.
I recognize, by the way, that the stock is up over $5 or 15%. But can you say 'short covering'? I knew you could.
Put this one in the 'not even with someone else's money' category for me.
Monday, December 1, 2008
So, how does this information change your life and mine? Well, I suppose the upside is that now that a recession has actually been declared, we're certainly closer to the end than we were before. Don't mistake what I just wrote - I am NOT saying the end of the recession is near. What I am saying is that getting past denial is the first step to recovery. How long recovery takes depends on the severity of the original illness.
Beyond that? Carry on. Nothing much to see here.
Look for all the glimmers of hope you can in the retail reports, folks, but just because it's shiny doesn't mean it's gold.
Friday, November 28, 2008
As I do every year, I arose this morning at a time that would have been considered uncivilized anywhere in the country, regardless of time zone. By a little after 3am I was chatting with folks lined up outside Kohl's. I followed that up with a trip to Wal-Mart for their 5am opening, then to Target for their 6am opening, and finally a walk through the mall for Macy's, JC Penney, Sears, Nordstrom and all the specialty stores.
Without further ado, this year's view from the battlefield:
- People are hurting financially and it's going to show in sales. 75% of shoppers interviewed are cutting back their spending for this holiday season significantly (anywhere from 30-90% cuts). Of the remaining 25%, most were just holding spending equal to last year, and the few who were spending more were generally in their 20s (no mortgage, little debt) and hadn't spent much last year.
- Consumers are shopping for what's on sale: just having items FOR sale isn't enough anymore. The days of paying whatever you have to just to make sure that a
is under the tree for the kids are just plain over. Most consumers were going to multiple stores to buy specific items in each location... and they were shopping fewer stores overall. This, by the way, defeats the purpose of doorbuster sales for the retailers, which are supposed to lure you in and get you to buy some non-discounted items also. The only exceptions to this rule were Wal-Mart shoppers. Wal-Mart management should be pleased to know that only one consumer interviewed in their line had any intention of going to another store after they were done at Wal-Mart. The 'save money, live better' message is resonating well with their consumers!
- Lines are longer than in previous years, but there is less in the baskets and everything in those baskets is pretty deeply discounted. I was asked by a reporter today if that meant bad margins for the stores, and the answer is only a 'maybe.' I know that JC Penney and other retailers have been trying to increase margins anyway they can, including buying items with discounting in mind. An example would be a retailer knowing that their consumer needs to buy jewelry at a certain price point, say $100. Just like last year, the retailer will have items at that price point, but the quality of the item will be lower this year, allowing them to maintain margins.
- There's no place like home. Once again, a lot more shoppers than I expected headed directly to the home departments at Kohl's, Macy's and JC Penney. Even though this stuff hasn't been selling well at full price, if you discount it they will buy.
- Most surprising trend? This year it had to be the lack of a must have item. Sure, parents were buying video games and DVDs for their kids. But only a few parents mentioned the Guitar Hero as something they had to have. GPS units, MP3 players, cheap flat screen TVs were all mentioned as desirable by shoppers... but virtually no one said they'd pay full price to get them.
- Most bags in the mall? This year it was a tie between Macy's and JC Penney, with Bath & Body Works getting special mention as the most prominent specialty retailer.
- The winner of the 'You Think This Stuff is Going to Sell Itself?' Award is Abercrombie & Fitch. Apparently the corporate motto is 'Discounts? We don't need no stinkin' discounts.' Unfortunately, based on the lack of traffic and sales in the store, I beg to differ.
- Biggest fall from favor award goes to Apple. I'm not saying they weren't selling anything, because I'm sure they were, but over the past few years the stores have been packed to overflow on Black Friday. Today? Not so much.
So, what do we do with all this information? I'm going to spend some time this weekend plowing through balance sheets, looking at corporate cash levels, and watching consumers. I firmly believe that today confirms that the holiday retail season is going to be as dismal as advertised, if not worse. I think there might be something to be said for shorting the retail index and pairing that with a long trade for a couple of high quality retail companies. Names to follow.
Friday, November 21, 2008
Although I have to say that the skills that Lee Scott has most utilized over the past three years have been more in the public relations and media arena. It's been all about the old soft shoe... but it's been backed up with action. And for that, I need to add a hearty congratulations to Lee Scott. I know I'm not on his Christmas card list, and in fact seemed to be on Wal-Mart's hit list for a number of years, but Lee, you done good. You fixed the problems. You brought in the right people, let them do what needed to be done, and the results have been worth waiting for. I'm sorry for that time a few years ago when you took a month off and I called for your resignation. It wasn't nice, but I was frustrated. In retrospect, it wouldn't have been the best thing for the company.
Now Lee, go enjoy your retirement. The folks you've put in place will carry on just great. You're leaving at a high point, and you've earned it.
As I've been saying over and over again lately, in this market it is all about the best operators. Can they control their expenses? Have they looked at every possible option for reducing their Cost of Goods Sold? Are they maximizing their sales per square foot? Have they gotten creative with their marketing, luring people into the stores with low margin stuff, then selling them some attractive higher margin items too?
The best companies know which levers they can pull in bad economic times, and those levers aren't something new to them. The best companies are led by management teams that understand that if the only way you can grow your earnings is through building more stores or selling more stuff, you're holding a pretty weak hand in the poker game that is global capitalism.
In this kind of market, I want to own companies holding 4 aces. These companies exist, but you need to look closely at how they've managed their businesses historically as well as currently. As Warren Buffett has been quoted, it's only when the tide goes out that you see who has been swimming naked. Avoid naked capitalism! Buy companies that have covered their backsides... and yours... well.
Tuesday, November 18, 2008
Home Depot rallied on bad numbers. Okay, part of that was because it's a Dow member and the Dow was rallying, but that doesn't account for it all. HD was up 3.6% vs 1.8% for the Dow. Gotta love that kind of reaction to a 31% fall in Q3 profit, even if it was partially because it didn't stink as much as expected.
Today's rally was brought to you courtesy of the letters HPQ. Hewlett Packard was able to pull off good numbers. It can happen folks. Let's see a little more of that. It will be a lot more fun. I promise.
Thursday, November 13, 2008
For stocks to be cheap, there has to be some benchmark to measure them against, whether it is peers, expected earnings, or history. The problem is that I don't think that we really have a clue what earnings are going to be for a majority of companies, the historical basis we're considering is too short (putting them versus the last 5 or 10 years is, dare I say it, just plain stupid - we're in an economic situation that goes back at least 30 years, if not 80 years), and when you put companies up against their peers the only relatively expensive companies are the companies that are actually doing okay in this economic malaise (you know, the only companies that I wouldn't mind owning at this point.)
Case in point: in the retail landscape, it's hard to find a company doing better than Wal-Mart, and they're relatively expensive too. They reported earnings this morning that were a penny better than expected (a huge accomplishment for a company of their size!) Now the headline you might have seen splashed about was that they took guidance down for next quarter, but that was because of a swing in foreign exchange, not because of operational issues. If you take the $0.06 hit that they are expecting from foreign exchange out of the equation, they are actually taking guidance UP for Q4. That is the kind of company I want to own.
Let's contrast that with the reports this afternoon from Kohl's and Nordstrom. They're both good operators: good management, good systems. Crappy sales. To quote my favorite former CIO, you might call the numbers they put up 'dismal and deleterious.'
On the surface they theoretically both beat expectations, but I'd hope at this point that you're looking below the surface. Kohl's actually beat expectations by a penny, but took Q4 earnings guidance down by 1/3. Customers just aren't buying. So is it cheap at 10x earnings? Maybe, if you truly believe that they'll grow earnings at 14% over the next 5 years... but do you REALLY believe that? I didn't think so.
Nordstrom beat recently lowered expectations by $0.02, but that result included a help of $0.03 from non-recurring items that they hadn't included in previous guidance. Or, put another way, they reported real numbers that were a little worse than they guided to a week ago. Oh, and then they put some icing on the cake... they lowered earnings by HALF for Q4. HALF. Hello, Seattle? We have a problem. This is the third time they've taken guidance down this year. And to have earnings looking like something closer to $0.35 for Q4 than $0.70, that's just abysmal. So it's trading at 5.4x times next year's earnings, doesn't that make it a buy? Sure. Go ahead. But use your money, not mine.
Wednesday, November 12, 2008
For many consumers, this is probably going to be The Holiday of Socks and Underwear. For most retailers, that’s going to translate to sackcloth and ashes for earnings.
The consumer is facing rising unemployment, higher food prices, tightening credit, and the evaporation of their balance sheets. Consumers are buying food and basics, all other categories have fallen off the proverbial cliff. They’re trading down wherever and whenever possible, and buying on sale when they don’t trade down. The one unknown is how the recent fall in gas prices will adjust consumer spending (down 45% off the July highs, roughly -15% from this time last year), but my best guess is that other concerns will trump it.
In order to entice shoppers into their stores, the bargains have already started. This is partly because many retailers still have fall merchandise to clear so they can get holiday into the stores, and partly because shoppers have proven to not make a move toward their wallets until the signs say 40% off or more. (JC Penney Tuesday through Thursday: 75% clearance merchandise, 15% off everything else in the store. Why would anyone think retailers are desperate?) Bankruptcy clearance sales are putting even more pressure on the ‘healthy’ (or would it be more appropriate to say ‘not yet in horrible trouble’) retailers, as they have to compete with the clearance pricing.
The one safe haven has been discount stores, but even within that group there are the haves and the have nots. Wal-Mart is the poster child for this recession: the one retailer who after three long years of promises and pain had finally gotten its house in order, and at exactly the right time. Wal-Mart’s mix of food and general merchandise (roughly 60/40 consumables/gm) has served it well. Costco and BJ’s Wholesale also sell a mix of products leveraged to consumables, and their performance reflects that. That contrasts with Target that doesn’t sell nearly as much food (41% of what they sell is apparel/home). Dollar stores are also doing well, as is as Aeropostale a teen retailer that specializes in lower priced merchandise that is still similar to the higher priced Abercrombie and American Eagle.
Macy’s and Best Buy reported this morning. Macy’s is managing through this time by not marking down, controlling inventories, and putting out a feel good message (LOVE LOVE LOVE the ‘Believe’ campaign they’re running) as opposed to some of their competitors (JCP noted above) that are really marketing on price. Best Buy told us this is the worst they’ve seen it. Of course, they’re not selling anything that is absolutely vital to the consumers’ survival (despite what kids might say about having to have the newest computer games.)
Surveys are showing that a majority of shoppers are planning on spending less this holiday season than last year. Those purchases that are made are going to focus on value for the money. That doesn’t bode well for gift cards this year, since a savvy shopper can shop the sales, buy a $100 sweater for $60 (or less) and get the mental credit with the gift receiver for having bought a $100 sweater. On the other hand, if you give a gift card $50, chances are you have to pay $50 for it. Although, there are a number of signs of desperation from the retailers that include ‘buy $100 in toys and get a $10 gift card (Fred Meyer… a Kroger affiliate much like a small WMT) and Mattel’s current offer of ‘buy $100 in Barbie paraphernalia (any retailer) and get a $50 Barbie Visa gift card for mom.’
Specifically on stocks reporting Thursday:
* I’m expecting that WMT could beat consensus of $0.76, although since we’re talking about WMT, it should only be by a penny or two.
* Kohl’s has already guided down to the lower end of $0.51-0.56. They’re going head to head with the rest of the department store space, and it’s a very value conscious consumer. They’re a fabulous competitor and have been able to manage costs extremely well historically which is going to be necessary for success going forward.
* Nordstrom. ::sigh:: Nordstrom is going to be painful. All we know is that numbers will be below previous guidance for $0.32-0.37 (consensus was $0.36, now $0.31, and I fear still too high.) Love management, think they’ve got great systems and cost advantages (commissioned based sales staff), but I am concerned that they’re not only missing the aspirational customers but that now their core customers have pulled way back.
Be careful out there.
Monday, November 10, 2008
For Howard Schultz to say that Starbucks thinks they're better positioned than other luxury retailers because those luxury retailers (I think he's talking about Saks and Nordstrom) had double digit negative comps while Starbucks Q4 comp was only down 8% in the U.S. Congratulations boys. It certainly couldn't have been because your foo-foo coffee costs $4 versus a $500 dress, could it?
True, cutting those extra stores should help the comps for the remaining stores. And it's also true that making most of the future international stores licensed stores (a.k.a. franchised) uses someone else's capital to grow their business. I'm still stumped at how they can come up with value offerings, sell $100 of gift cards at Costco for $79.99, expect lower comps, and still come up with margin expansion for next year.
I truly wish them the best, but I'm just not sure that the markets are going to buy this cup of coffee until after a quarter or two of taste tests. While I wait, I'll be humming the theme from "Here Come the Brides" (yes, I'm that old)... 'the bluest skies you've ever seen are in Seattle...'
Thursday, November 6, 2008
The numbers are miserable. Of all the companies I track, only two had positive comp store sales (comps): Wal-Mart (+2.4%) and Aeropostale (+1%)... and Aeorpostale's comp was below the expectation for +4%. The department stores had it rough, and the higher end stores were hit especially hard. Nordstrom managed to 'beat' expectations for a -12.5% comp by reporting -15.5%. Saks not only had a -16.6% comp, but said that even their (previously?) well-heeled shoppers weren't buying much if it wasn't on sale. That's saying something for a store that targets customers with an income in the top 5% demographic!
Reports today were filled with companies guiding down expectations prior to the release of Q3 earnings, which start next week. Two thoughts on this: first, if you didn't already realize that things have just been getting worse for the consumer you haven't been paying attention; and second, where the HECK have the Wall Street analysts been? I have to say, many times when I've met with those guys and company managements, I've been amazed at how much more I know about the companies and how they're executing in the stores than the headline analyst did. Scary. Get out and get into the malls, boys. It's eye opening! ::rant over::
Anyway, on the 'opps, we did it again... our earnings aren't going to make previously lowered expectations' list are:
- JC Penney (within range if you include a real estate sale is NOT okay)
- American Eagle
- Pacific Sunwear
Interestingly, the list of companies affirming guidance or raising guidance is as long, just from different sectors:
- BJ's Wholesale (gas helped a lot)
- Ross Stores
- TJX Companies
- Aeropostale (the only specialty retailer really performing)
- Hot Topic
- The Gap (low sales are okay if you can still make margins)
So what will be come of America's retailers? It's going to be ugly folks. To paraphrase, these are the times that try retailer's souls. My prediction is that within a few years we will have a major contraction in specialty retail. Folks like Abercrombie & Fitch will give up on some of their brand extentions like RUEHL that just aren't working. American Eagle will shutter Martin + Osa. Gap will have to shutter a lot of its retail space. Limited, it's been nice, but can you really make it? Chico's? Coldwater Creek? You're no longer growth businesses, and I'm not sure there's room enough for both of you in this new landscape.
The American consumer has rediscovered frugality, and this time it isn't a phase, it HAS to be religion. I'm just not sure there's a reason to own much beyond the discount stores until more of the pain has passed.
Tuesday, August 5, 2008
Once upon a time, in a country ever so close, there were a group of peasants whose grandparents had lived through some really difficult times. As a result, throughout their lives, those grandparents (the grands) did quite strange things like save money, eat leftovers, wash and reuse aluminum foil, and mend their own clothes. The grands lived within their means. At the same time, the grands loved their children and grandchildren, and wanted nothing but the best for them – which included sparing their progeny having to endure any lack of material goods. The progeny weren’t really spoiled, they just liked nice things.
Everything in the kingdom clicked along normally for quite some time: the progeny bought what they could for themselves, the grands chipped in when there was even the suspicion of want, and everyone lived a moderately comfortable lifestyle. Then, one day near the turn of the century, everything changed when the dominant industry, technology, found itself locked in the dungeon with a dragon in a fight for its life. At roughly the same time, the kingdom came under siege from terrorists, which desperately frightened the peasants. In order to fight the dual threats of dragon and siege, the kingdom’s Financial Wizard, Uncle Greenspan, decided to flood the kingdom with low interest cash. And the peasants rejoiced.
The rejoicing was contained in the peasantry though, for certain investors did not like it at all. Low interest cash made it difficult for them to earn enough interest income. So the bankers, being creative fellows, decided to package home mortgages for sale to those investors at higher interest rates than Uncle Greenspan was willing to offer. Because they needed a continuous stream of new mortgages in order to create these new investment vehicles, the bankers lent more and more of the peasants money to buy homes… including peasants who had didn’t earn enough barley per year or already had two homes. Home demand grew as rental peasants became home owners, and the average price of a hovel within the kingdom rose significantly. The creative bankers, still hungry for new loans, lent the home owning peasants even more money against the increased value of their hovels.
At first the peasants used the new loans to pay off debts owed, or to add a new porch or a better thatch roof to their hovel. But as the home prices continued to rise and the creative bankers continued to lend, the peasants started looking toward the purchasing habits of the royalty for inspiration on how to spend their new found wealth. The peasants shopped and shopped and shopped, truly enjoying the nicer things of life.
But as in all fairy tales, eventually the Evil Queen must put in her cameo appearance. In this case, the Evil Queen removed the ‘beauty’ spell placed on the investments created by the creative bankers, causing investors to flee the investments with horror. This in turn meant that there were fewer peasants able to buy homes, and soon not only were hovel prices kingdom-wide slipping, but there also was no more almost-free money to buy the nicer things in life. The kingdom’s consumer economy was under siege. Uncle Bernanke (Uncle Greenspan having since retired to the book and lecture circuit) and his friends in the turrets of Capitol Hill issued alms to the peasants in the late spring to reinvigorate their spending and restart the party. But alas, with the fall in hovel prices, the retrenching of the stock market as well as high food and fuel prices, peasants are stretched as if on the rack, despite a fairly decent employment outlook. It appears that the peasants will be recovering from their bout of affluenza for a long time to come. If only they had listened to the lessons of their grandparents. Interestingly, even the royalty seems to be at least slightly cognizant of the higher prices and economic pressures on the peasantry – not one has been heard uttering ‘let them eat cake’ – probably because it’s an election year.
Luckily, the Evil Queen’s spell has had limited affect on other parts of the kingdom’s economy. Gross Domestic Product continues to muddle along at very slightly positive rate, although our firm’s chief wizard/economist believes that the odds of the kingdom experiencing an authentic blessed-by-the-powers-that-be recession now stand at 60-70%. Of course, the peasantry all agree that we’re already in that recession, but what do they know? Interestingly, manufacturing, especially manufacturing for export to other kingdoms, continues to be decent. The net export component added about 0.8% to Q1 GDP, although it was hurt by higher oil imports (higher in dollar terms, not necessarily barrels of oil.)
That being said, medium sized companies are finding it hard to borrow money for their businesses from the not-feeling-so-creative-anymore bankers. The most visible victims of this are being seen in the retail sector, where consumers and bankers have pulled back at the same time. I am keeping a list of retailers who have filed for bankruptcy, and it is getting longer every day.
The good news is that the international kingdoms economies, especially the emerging economies of the BRIC nations (Brazil, Russia, India and China) seem to be holding their own, although slowing a mite from their torrid pace. When selecting stocks over the recent past, we have given a higher preference to companies with overseas exposure. We have also tried to minimize the financial sector exposure, emphasizing instead stocks within the energy complex. We do expect that slowing global growth should relieve some of the pressure on commodities, which should, in turn, lessen the burden on the US consumer.
The best way to survive this siege of the markets is through diversification and patience. All sieges end eventually. And even in environments like this different investment classes and sectors can perform. Case in point is the performance within the S&P 500 sectors for the second quarter. While the financial sector (home of the not-feeling-so-creative-anymore bankers) returned a miserable -18.3% and the peasant consumer discretionary sector lost -7.8%, the energy sector gained 17.3% and the utility sector returned 8.0%. One of the things that we pride ourselves on is our efforts to protect clients’ investments on the downside. We are definitely risk averse and have tried our best to position your portfolio to reflect that.
All fairy tales aside, these are the times in the market that build character. Try to remember that eventually we’ll come to the part where they all lived happily ever after.
Thursday, June 5, 2008
Wal-Mart’s numbers were more than double expectations, coming in at 3.9% for the total company (1.4% expected). Of particular note: US Stores were up 4% (guidance was 0-2% and consensus was 1.4%). They mentioned specifically that they are seeing a bump from the stimulus checks. In a different press meeting this morning the number $350 million thus far was bandied about. Given that the average SuperCenter does $1 million per day (old fact, but probably still pretty correct), that might be a bit significant. Both traffic and ticket were up.
Target was within guidance but is lagging Wal-Mart and others who sell more food. TGT’s consumables exposure is about 20% of sales, and over 40% of sales (last year anyway) were in the weak apparel and home categories.
Nordstrom’s 10.9% comp was within the expected range of 8-12%. June expected to be VERY weak as the Half Yearly sale for Women & Children was moved from June to May. The two months combined should be fine.
Saks, a favorite on the upper end of the scale until now, fell out of bed. Seems like there might have been a few too many friends and family discounts given lately.
As for the rest of the mall? Nothing to write home about except Aeropostale (wow!), Zumiez and Hot Topic. Almost everyone else did worse than expected, in some cases (Gap) by unexplainably high percentage points. It's bad out there folks, but could you at least TRY, please?
Wednesday, June 4, 2008
These numbers can be both a huge help and a pain in the tush when analyzing retailers. The numbers themselves don't matter to the stock prices as much as how they differ from analyst expectations. Numbers may be not just negative but very negative, but as long as they're better than expectations, everything's hunky dory. And conversely, positive is good, but if they don't beat expectations, all bets are off.
One of tricks is sorting the wheat from the chaff in the releases. Is a company blaming weather for poor performance? (They almost never give the weather credit for good sales.) Is anyone else blaming the weather too? Where are their stores concentrated? How's the economy (or the weather) in that area of the country? Are they up against easy comparisons from last year, or will last year be hard to beat? In March and April, you also have to take into consideration when Easter was last year... a change from month to month can also affect sales significantly.
Oh, and don't forget to look for clues about earnings. Sometimes the company will come right out and adjust earnings expectations up or down. Sometimes they'll just hint that margins are weak or strong, which may affect the quarter's earnings, even if they don't say so outright.
Getting back to tomorrow's numbers: expectations aren't very high. It should be happy days for the usual suspects selling food (see my post two days ago) such as Costco and Wal-Mart. The department stores aren't expected to do much at all... negative numbers should abound, although Nordstrom moved a big sale from June into May, so their comps should be good. In specialty and apparel stores, don't expect much there either. It's tough days at the mall.
Monday, June 2, 2008
I have sick sense of humor sometimes, but I find it tremendously amusing that if the company is growing its store base and appeals to an upper income demographic, Wall Street loves it. As if $4 a gallon gas will never affect people who make over $100k a year. Let's be real folks - the only way this economy isn't putting the squeeze on you is if you don't eat or use energy. And those folks above the US median income level (which is roughly $47k/year), in many cases those are the folks that stretched themselves even further beyond their means and are hurting more now.
So how on earth does someone invest in retail stocks right now, given all that? First, one takes a heavy dose of one's favorite antacid. Then, the next step is to determine your personal outlook on the economy. (You might want to take another swig from that Maalox bottle right about now.)
If your economic glass is half empty, think about where people either shop to save money or have to shop to survive. I'm a personal believer (and holder) of companies that sell food and other consumables such as Wal-Mart and Costco. I'm hard pressed to find a stock that I like more than Wal-Mart. Really. Wal-Mart. They've finally shifted the majority of their marketing away from that hideous bouncing smiley face and it's unhealthy obsession with dropping prices. Don't get me wrong, consumers absolutely need low prices right now. But they're not so desperate for low prices that they would endure the seven levels of hell that a shopping trip to Wal-Mart used to involve. Thank goodness management finally brought some fresh blood into their little closed world of NW Arkansas, and exciting new ideas such as 'even people on a budget like to shop in a nice environment,' and 'if people aren't in a rush to leave the store, maybe they will spend more money on discretionary items' started invading the corporate consciousness. Revolutionary, no?
Retail today is more than the old adage 'stack it high and watch it fly.' Retail is both art and science. For years, Wal-Mart excelled at the science of retailing - selling stuff cheap and controlling costs. Watch the CNBC documentary "The Age of Wal-Mart" sometime. The fact that they even know that strawberry PopTarts sell best before a hurricane scares me. Even scarier: that it took them so long to understand that a clean bathroom and short checkout lines make for happy consumers. And who would have ever guessed that putting up little signs that show us what an outfit should look like would sell more clothing? Oh yeah, the competition.
Which brings me back to how Wal-Mart has changed. As one Wall Street wonk put it recently, "this isn't your father's Wal-Mart." They have made strides on employee health care and the environment, both of which were causing issues with and for investors. They finally recognized that growth for growth's sake wasn't working. US retail domination via copious store count growth is no longer a stated goal (although World Retail Domination still seems to be on the table.) Thinking about Return on Investment is back in vogue at headquarters. And the arrogance that management once displayed toward their critics seems to have been at least muted if not dissipated entirely. Thank you Leslie Dach and Eduardo Castro-Wright: whatever they're paying you isn't nearly enough.
So there are all the touchy-feely reasons for owning the stock. The bottom line for a capitalist is buying the stock low and selling higher. Wal-Mart is currently trading at 16.7 times January 2009 consensus earnings of $3.45. Personally, my model puts earnings at $3.51, or a P/E of 16.3x '09 estimates. I am looking for P/E multiple expansion (investors willing to pay higher prices for a similar level of earnings) as it becomes more and more obvious that Jane Consumer isn't going back to her lavish lifestyle any time soon. Last year's aspirational consumer is now aspiring to put food on their table and gas in their tanks! I'm guessing that at least a 18.5x next year's earnings is reasonable, or about $65. If they continue to deliver strong sales and earnings, that number may experience inflation too.
Next time: where to look for investments if your economic glass is half full.
Sunday, June 1, 2008
Retail is in my blood: my dad worked in retail from before I was born, and a Saturday of quality time with dad used to translate to walking stores with a clipboard evaluating everything from merchandising to cleanliness to customer service. Grandma was in retail too, and I blame her for my well developed sense of wardrobe entitlement (i.e. big and full closet). My husband will attest that I spend copious amounts of time at the mall, and I'm on a first name basis with way too many sales clerks.
Beyond that, I've made my living in the investment world for over 20 years. I've worked on strategies that were focused on growth, value, growth-at-a-reasonable-price, quantitative analysis, large cap, small cap, mid cap, domestic securities, and international investments. Been there, done that, got the t-shirt in six colors and three sizes.
I look forward to opening up a dialogue with anyone that might want to discuss what I'll be putting out as fodder.