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| | Street Patrol
Wait for a sale on 5 retail winners
Looking for earnings-season clues down at the mall, I found after-Christmas sales a little too eager at some chains -- and encouraging signs at others. Any price weakness could make them buys.
By Robert Walberg
Financial and technology companies have dominated the earnings calendar over the past few weeks, but the focus will shift to retailers in February.
If youve been reading this column, and shame on you if you havent, then you know that I spent many hours shopping the malls during the holidays, sleuthing about in an attempt to identify which chains might enjoy a strong fourth quarter. Starting next week, well discover whether I was right in my view that Abercrombie & Fitch (ANF, news, msgs) would bomb and Pacific Sunwear (PSUN, news, msgs) would shine when stores start reporting their earnings.
To guide you further through the retail earnings-season maze, I motored out to the malls again last week to check on the post-Christmas sales and new lines. But before we get to my assessments, a quick lesson on how to handicap the winners.
What it takes to win
Posting solid fourth-quarter income is only a quarter of the battle. The most successful retailers will be the ones that also beat expectations on strong gross sales and that raise guidance for the current quarter. Its a tough but simple game. If a well-established company such as Best Buy (BBY, news, msgs) has a history of beating analysts consensus estimates by one to two cents each quarter, then anything less will be considered a disappointment. Similarly, if a company has been growing revenues by an average of 15% over the last several years and sales growth slips to just 12% in the fourth quarter, the stock might slump even if earnings beat expectations.
Inventories are a key component to monitor. You dont want to see them growing faster than sales, since that suggests a company might need to slash prices to move excess product later -- putting downward pressure on margins and earnings. Theres an inventory line in the financial statements, of course, but you can get a good sense of where a company is at by studying the amount of floor space devotes to sale merchandise and the extent of any markdowns.
Listed in the table below are several of my projected winners and losers, as well as data that may be helpful to determine how the stocks are likely to respond to their numbers.
| | | Company | Report date | Current est.
vs. year-ago | EPS needed to
meet expectations | Avg. % revenue gain
past 10 qtrs | | Projected winners | | | | | | Best Buy (BBY, news, msgs) | 3/31 | $1.39 v. $1.16 | $1.40 | 19.4% | | Chicos (CHS, news, msgs) | 3/02 | $0.27 v. $0.17 | $0.29 | 40.6% | | Hot Topic (HOTT, news, msgs) | 2/18 | $0.44 v. $0.34 | $0.45 | 30.0% | | Pacific Sunwear (PSUN, news, msgs) | 3/01 | $0.41 v. $0.31 | $0.42 | 20.2% | | Tiffany (TIF, news, msgs) | 2/25 | $0.70 v. $0.60 | $0.72 | 6.0% | | | | | | | Projected losers | | | | | | Abercrombie & Fitch (ANF, news, msgs) | 2/17 | $0.92 v. $0.93 | $0.94 | 12.0% | | Aeropostale (ARO, news, msgs) | 2/19 | $0.66 v. $0.46 | $0.68 | 35.4%* | | Too Inc. (TOO, news, msgs) | 2/18 | $0.55 v. $0.72 | $0.55 | 4.2%* | | | | | | | Too close to call | | | | | | Home Depot (HD, news, msgs) | 2/17 | $0.38 v. $0.30 | $0.40 | 12.6% | | Williams-Sonoma (WSM, news, msgs) | 2/19 | $0.84 v. $0.67 | $0.85 | 14.7% |
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* Sales data for Too and Aeropostale went back only eight and six quarters, respectively.
3 that look weak
Now lets go shopping. Ill start with the potential losers -- and No. 1 on that list is Abercrombie. My travels took me to only a few stores in a single geographic region, but what I saw was troubling. Nearly a third of the stores floor space was devoted to pushing sale merchandise, and the markdowns were significant. As for spring merchandise, the company has done nothing to distinguish itself from the competition, which continues to steal share through better prices. Despite its reasonable valuations and recent relative strength, Abercrombie will likely struggle to keep pace with the market, and even its peers, in the months to come.
The same can be said for Aeropostale (ARO, news, msgs). Though its pricing is much more attractive than Abercrombies, its merchandise suffers from mediocre quality and boring styles. As the table above shows, Aeropostale also has to post some lofty numbers in order to meet expectations. The stock is likely to take a meaningful hit at even the slightest hint that the rate of growth is slowing.
Too Inc. (TOO, news, msgs) is another company that might struggle over the short term, as the stores I visited had aggressively marked down its remaining winter merchandise. However, on a positive note, the spring clothes looked fresh and vibrant. Relatively soft comparisons should also dull the pain from a potentially disappointing fourth quarter. In other words, this is a stock investors might want to consider buying on weakness given an improved merchandise mix, reasonable valuations and soft comparisons.
5 potential buys
Five companies that stood out as being well-positioned, for a strong fourth quarter and beyond, were Chicos FAS (CHS, news, msgs), Hot Topic (HOTT, news, msgs), Pacific Sunwear, Best Buy and Tiffany (TIF, news, msgs). As you might imagine, there were no sales of note at Tiffany. Yet the same could be said for Hot Topic. While these companies serve much different clientele, its clear that they both benefit from brand strength and product differentiation.
Meanwhile, the post-Christmas sales at PacSun and Chico's were modest, suggesting that both companies enjoyed a relatively strong holiday. On another positive note, both stores were crowded. It looks, at least from this shoppers perspective, as though PacSun continues to steal share from the likes of Abercrombie & Fitch and American Eagle Outfitters (AEOS, news, msgs), while Chico's continues to win customers from stores such as Talbots (TLB, news, msgs).
Finally, Best Buy is the category-killer in electronics. With attractive prices for digital cameras, TiVos, satellite dishes, big screen TVs and flat-panel computer monitors, the company should post another strong quarter. While it might suffer a slowdown in the next couple of quarters because of seasonal factors, Best Buy remains the obvious leader in this category and the one electronics retailer thats a near must own. Consequently, barring any big negative surprises, any near-term price weakness should be seen as a long-term buying opportunity.
That leaves me with two. My visits to Williams-Sonoma (WSM, news, msgs) and Home Depot (HD, news, msgs) left me neither impressed nor concerned. Expectations for both are relatively high, so the risks over the short term are also high. Both stocks are also tied to perceptions in the housing sector and the future growth in that industry is expected to slow. So while nothing in the stores screamed caution, nothing whispered a buy signal either.
The place at the table is set. Now its time to see if earnings deliver.
Editor's Note: At the time of publication, Robert Walberg did not own or control shares in any of the stocks mentioned in this column.
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