It covers a multitude of sins

It's interesting to me how the earnings reports of some of the best companies are surprising my breathern on Wall Street. Look at Macy's. Look at Dell. Look at The Gap. Look at this recession's poster child, Wal-Mart. Their sales weren't nearly where they needed to be, but the bottom line number was fabulous, just fabulous. The Wall Street Wonks are scratching their heads, trying to figure out how their channel checks could have lead the some wrong.

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.

Limbo!

All I can think about after this morning's retail same store sales release is doing the limbo... you know, the dance where the refrain is 'how low can you go?'

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:

• Nordstrom
• Macy's
• Kohl's
• JC Penney (within range if you include a real estate sale is NOT okay)
• American Eagle
• Pacific Sunwear
• Zumiez

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.