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Published: June 7, 2010
Investors have been parsing retail sales
data for May, but if they want to know the real direction for
the group, they’ll need to check out the monthly snapshot of
employment trends, which will be released Friday morning. The
U.S. economy has begun adding jobs at a meaningful clip in
recent months. But if job growth stalls out, it’s hard to
envision any upside for retail stocks. (The May job reading
should initially seem quite impressive, thanks to massive hiring
for the census. But investors will watch for job creation
outside of the census. Estimates currently call for 150,000
non-census jobs being created in May).
Far Healthier than Before
When the economy slumped a few years back, retailers were caught
off guard. Inventories and operating expenses were far too high,
forcing many retailers to sharply cut back. They eventually did,
and that has triggered a solid rebound in profits and
working capital. It’s been quite some time since retailers
were in such a healthy shape. Gone are the days of massive
markdowns to move goods out of the warehouse.
You get a sense of that health by looking at the SPDR Retail
ETF (NYSE: PCX), which sharply plunged in late 2008 but now
stands right where it was back in 2007, when sales were strong.
The key difference between now and then: sales remain stuck at
lower levels, but so do inventories and expenses. So profits
have rebounded. Trouble is, all the low-hanging fruit has been
picked, so for retailers to power earnings higher, they’ll need
to see sales rise back toward 2007 levels. If and when that
happens, the sector should post record profit levels.
Diverging Fortunes
Against that macro backdrop, individual retailers face varying
trends. For example, those that cater to teens are having a
tough time as disposable income for the demographic is weak --
especially with the paucity of summer jobs available. Only
Aeropostale (NYSE: ARO) has been able to pry cash from their
purses. Shares are getting a +5% lift today as the retailer
announced that same-store sales were modestly higher in May from
a year ago, even though the year-ago results were quite robust.
Yet the clouds looming over the entire sector have kept a lid on
shares: they still only trade for around 11 times projected
fiscal (January) 2011 profits, even as those profits are
expected to be more than +20% higher than fiscal 2010 results.
Among teenagers, a hot brand can stay that way for some time. In
the middle of the last decade, Abercrombie & Fitch (NYSE: ANF)
was a teen favorite - and stayed that way for a number of years.
Now it's Aeropostale’s time in the teen spotlight.
Best in Class Stay that Way
Amid a month of lackluster sales, it should come as no surprise
that Kohl’s (NYSE: KSS) posted another round of
impressive comps. The department store retailer has been hitting
its sales targets for a seeming eternity, and in the process,
taking market share from former industry leaders such as
Dillard’s (NYSE: DDS).
A combination of
modest same-store
sales gains and a
small expansion in
its store base
should enable Kohl’s
to boost sales +7%
to +10% this year,
and profits at a
+15% clip. If and
when the
unemployment rate
starts to drop, the
stage would be set
for continued
impressive gains
from Kohl’s, which
wins more converts
from rivals with
each passing
quarter. Shares
trade for a
reasonable 14 times
projected fiscal
(January) 2011
profits. That
multiple is likely
to expand closer to
20 when job growth
is on a sustainable
path. That works out
to be +35% upside
from current levels.
Well-heeled shoppers
have returned in
force: same store
sales at Saks
(NYSE: SKS) and
privately-held
Neiman Marcus both
rose +5% in May.
Saks recently posted
first-quarter
profits that were
more than double the
consensus forecast,
thanks to a
turnaround in
same-store sales,
which had been
negative for seven
straight quarters.
The retailer is
coming up against
fairly weak
comparisons from
last year, and
should continue to
post impressive
gains as we saw in
May. Rising sales
are helping Saks to
avoid discounting,
which is supporting
gross margins. They
rose 400 basis
points from a year
ago in the first
quarter.
But Saks has more
work to do. The
company is likely to
only reach
break-even this
year, and may not
earn more than $0.25
or $0.30 a share
next year. Shares
trade for more than
30 times the high
end of that range.
That profit picture
obscures an
otherwise very
healthy operating
outlook. If consumer
spending resumes
back to 2007 levels,
which may not happen
before 2012 or 2013,
Saks could start to
earn $0.50 or even
$0.75 a share. In
that context, shares
appear reasonably
priced. But with
unemployment
remaining at
stubbornly high
levels, that’s not a
bet many are willing
to make just yet.
Action to Take
-->
Shares of a lot of
retailers have
pulled back in
recent weeks, and
are unlikely to
rally if Friday’s
unemployment report
indicates a
painfully slow job
recovery. Yet if we
see a strong jobs
number, many of
these recent
laggards could show
real leadership once
again. If you take a
longer view, and
want to stick with
proven operators
that can do well in
any economic
climate, then you
may want to consider
Kohl’s and
Aeropostale.
-- David Sterman
Staff Writer
StreetAuthority |
