And here I am again... more about the consumer

So, I can't figure out how to imbed this video, but here's a link to my Bloomberg TV interview on Thursday.

A steeplechase for Shetland ponies

When I woke up before the crack of dawn this morning to review April's retail sales, I was expecting that things would be better than expected. I didn't get it posted to the blog, but if you're following me on Twitter (see the side bar to the right) you saw my notes from last weekend's mall walk. For the first time in months, malls were busy last weekend. People were parting with cash. Not large amounts of cash. But parking lots were fuller and more bags were being carried in greater quantity than I'd seen in my last 2 months of mall walks. Call it a smallish bounce off the bottom, but whatever you do, don't call it a return to a need for Spendaholics Anonymous.

My view is born out in this morning's comparable store sales numbers. Wal-Mart, bastion of the 'Save Money, Live Better' crowd beat expectations handily. Aeropostale, the poor man's value-conscious shopper's Abercrombie & Fitch, hit it out of the park with a 20% comp gain on the back of a 25% gain this time last year. Amazing. Oh, and the real Abercrombie? Down -22%. Price/value matters, folks. The shopper is spending, but they're being careful about how much and where.

Case in point on that value thingy? Sak's same store sales down over 31%. Nordstrom was 'only' down 10.8%, better than expected and more in line with Macy's (down 9.1%) because JWN has added more offerings at lower price points. Ross, TJX - both up nicely. Kohl's & JCP? Sales down, but not as much as expected... Q1 guidance raised. Thing is, you can only manage inventory and costs so much, eventually you have to have sales or make more drastic adjustments that will cause hate and discontent amongst the shoppers and perhaps shareholders.

The big questions now surround guidance for the second quarter and beyond as well as healthy scrutiny of Wall Street analyst's earnings estimates. The latter worries me more than the former. I've never known a group of folks more likely to take two data points and draw a straight line than the lemmings of Wall Street. It should be intersting to see how many different ways folks can justify owning these stocks at these valuations in this economic environment.

But if the retailers and analysts set the bar low enough, it will be just like a steeplechase for Shetland ponies - such an easy hurdle that almost anyone can get over it. I suppose in that environment you should consider shorting those that still trip themselves up.

By the way, if you're interested in hearing this morning's Bloomberg interview, click here.

When it happens to the strong...

... You have to believe it is a real trend.

Costco announced this morning that they will be closing their two Costco Home stores. I was just up there a couple of weeks ago, and it was certainly a quieter visit than a couple of years ago when we all were spending way too much money. There's no financial impact to the company: the leases are ending, the employees will transfer to other places, and it will all just go away.

These guys are a strong company financially, and management is amongst the best in retail. If they're making this kind of decision to rationalize their stores and extension brands, it reinforces my belief that we're going to see a lot more of this from the weaker hands in retail. UBS finally published on this topic in the past week, the first that I've really heard from any of the major Wall Street analysts.

Prepare to wave buh bye to brand extensions like RUEHL, Martin + Osa, and others. They haven't been announced yet, but it's got to be close.

Yep, he saw his shadow all right

So I know I'm a couple of days late, but on Monday Punxsutawney Phil (the most famous groundhog ever) saw his shadow, thus predicting another six weeks of winter.

Interestingly, in a similar ceremony held this morning in Issaquah, Washington, my friends at Costco confirmed Phil's bleak outlook. The company came out with comparable store sales of -2% ... not horrid when you consider that gasoline price declines hurt sales by 4% in the US and the strong dollar accounted for an 18% (yes, eighteen percent, that's not a typo) swing in International comparable sales from 9% in local currencies to -9% in dollars. But still, not good. Even worse, earnings for this quarter are going to be 'significantly' below the $0.70 estimated by Wall Street pundits and the company is withdrawing guidance for the rest of the year. 'Significantly' translated to 10% below expectations last quarter... but the company isn't offering interpretations this quarter. Let's just call it yucky and move on.

More of an issue than sales were margins on discretionary items. Let's face it, even though Costco got good pricing on some fabulous items, they were competing against mainstream retailers that were quite literally willing to give away the shirts on their racks in order to clear inventory. One example is the cashmere sweaters they had in the Issaquah store. They arrived in November with a price of about $69. Normally, they would have sold like hot cakes at the original price, but these are not, if you haven't noticed, normal times. By Christmas they were about $49. The killer, though, was that in mid to late January there were STILL cashmere sweaters for sale. Maybe cashmere is 'out' right now. I noticed it wasn't selling well at Macy's either. But more likely, Costco's 'bargain' price didn't look as bargain-ish when compared to the discounts the mainline retailers offered. Thank goodness they sell food too, which drove the frequency of customer visits to a high 4%.

Bottom line for me, though, is that if Costco which sells food/staples (~60% of revenue) and discounted discretionary items (~40% of revenue) is having issues, we are obviously still smack dab in the winter of our discontent. It doesn't appear likely that the sun, my friends, is going to shine on the consumer in the near term - literally or figuratively.

That explains that

Another blinding glimpse of the obvious was revealed yesterday, although I have to admit that it wasn't even on my radar screen as a possibility. I was both thrilled and a bit shocked that Costco was able to get a significant amount of Waterford crystal for the holidays. Costco has benefitted from the desperately bleak retail landscape for over a year now, as suppliers that hadn't considered them worthy of carrying their goods before suddenly saw them as a fabulous distribution mechanism. This has happened in previous recessions, so it wasn't too much of a shock.

But this time around, Costco's ability to get goods might have a bit more of a predictive value. The first sign of a crack at Crocs? Thousands of pairs of the popular yet distinctly unfashionable shoes showing up at Costco warehouses. Now, we hear about the bankruptcy of Waterford.

Geez, add to this a couple of financially-based suicides, and people might actually get the idea that the world-wide economy is a bit under the weather or something.

Try to keep up, please

Times, they are a changin'. It was just about 6 months ago that I sat down with Costco management and heard things that gave me chills. Part of it, I'm sure, was the fact that it was the day before they preannounced a Q4 (August fiscal year end) earnings shortfall, so they were glum anyway (although we didn't know about that until 12 hours later).

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.

Socks and underwear

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.

A bitter cup

As much as I like my cinnamon dulce lattes, it's not hard to see how Starbucks came up with such absolutely abysmal Q4 earnings of $0.01 versus expectations for $0.13. Sure, $0.09 of it was due to restructuring costs, but $0.10 is still a big miss. While management has made some of the hard choices needed (closing 600 underperforming stores, cutting the bloated headquarters staff), I can't help but think that they're still looking at the world through rose colored glasses.

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...'

Who woulda guessed?

Here's a news flash, kids - trends continue to play out as expected. It’s all about consumables and discounting. Mall traffic and sales are weak, which shows clearly in comps for mall-based concepts. The consumer appears to be consolidating shopping trips to places like Wal-Mart and Costco that allow them to buy basics as well as discretionary items. Television sales are down in even the warehouse clubs, but up at Wal-Mart as the commoditization of flat screens continues. No retailers that I surveyed guided down.

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?

not so Great Expectations

Tomorrow morning at a time that is so early it doesn't belong on any civilized person's clock the monthly onslaught of information known in retail land as comps (comparable store sales) will be released for our viewing pleasure.

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.