Retail Outlook: Valuations Have Discounted Economic Improvements

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 |  Includes: ADBE, BBY, CCL, DRI, FDX, JOY, NKE
by: Greg Feirman

Whatever merit there might be in stocks is decidedly speculative. That doesn’t mean that the returns must be (or even over the very short term, are likely to be) negative. What it does mean is that whatever returns emerge are unlikely to be durably positive. Market gains from these levels will most probably be given back, possibly very abruptly.

- John Hussman, “Clarity and Valuation”, Weekly Market Comment, December 21

The last week or so has offered us the chance to review quarterly earnings from some significant companies. These reports give us insight into what is actually happening on the ground. Not government GDP or employment numbers but reports using the ultimate metric: money. Show me the money! - because that’s what really counts.

In last week’s Client Note, I noted Best Buy’s (NYSE:BBY) solid earnings report. U.S. same store sales were up 4.6% for the quarter ended November 28, 2009. That’s a huge improvement after four straight quarters of declining U.S. same store sales.

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Also giving us insight into the U.S. consumer was Darden Restaurant’s (NYSE:DRI), owner of The Olive Tree and Red Lobster, earnings report from last Friday morning. Same store sales at Darden’s 702 Olive Tree restaurants were off 0.7% excluding discrepancies arising from the timing of the Thanksgiving holiday. Same store sales at their 691 Red Lobster’s were off 7.6% excluding discrepancies.

Olive Tree is their flagship restaurant and same store sales here also show some stabilization and improvement compared to previous quarters. But it is still a tough go for Darden. Overall revenue was off 1.7% from the year ago quarter even though they now own 55 (+3.2%) more stores. Earnings before income taxes of $80.7 million compare to $82.5 million a year ago. The year ago period ending November 23, 2008 was a really tough time and while we are seeing stabilization and even improvement, business is in no way booming.

ccl-1-year-chartClick to enlarge

The same things can be said about Carnival Cruise Lines (NYSE:CCL) which also reported earnings last Friday morning. Net income was off 48% due to compressed margins. Net revenue yield per available berth day (ALBD) was $162.57 - down 9% from last year’s $177.78. Net cruise costs per available berth day, however, were down only 3% to $121.82 from last year’s $126.20 - even as fuel costs were down year over year. These guys are filling their cruises but doing so by cutting prices.

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Lastly on the consumer side is Nike (NYSE:NKE) which reported earnings last Thursday. Excluding currency changes, orders scheduled for delivery from December 2009 through April 2010 were off 1% from the year ago period. Overall revenue and net income were off 4%.

All four of these consumer discretionary stocks are up substantially from their lows. BBY and DRI are trading at 13 times management’s estimates for this fiscal year’s earnings and CCL and NKE* are trading at 15 times. That’s not ridiculously expensive but it is fully valued in such a tough consumer spending environment.

* NKE’s valuation backs out $7 a share of net cash on their balance sheet and is a trailing P/E multiple as management provides no forward guidance.

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On the enterprise side of things, Adobe Systems (NASDAQ:ADBE), Joy Global (JOYG) and Federal Express (NYSE:FDX) all reported earnings last week.

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Adobe reported earnings of 39 cents a share compared to 60 cents in the year ago period and 35 cents the previous quarter. Revenues were off 17% from the year ago period though they were up 9% sequentially.

At $37, Adobe shares are trading at 19 times analysts upbeat estimates for this fiscal year. Shares are up more than 100% from their March lows.

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Fourth quarter bookings at Joy Global (JOYG), a mining equipment manufacturer, for the quarter ended October 30, 2009 were off 44% from the year ago period consisting of a 74% decline in orders for new equipment and a 5% increase in orders for aftermarket equipment. Revenues were off 7% from last year’s peak quarter.

Shares of JOYG are trading at 19 times management estimates for this fiscal year and are up almost 300% from their March lows.

fdx-1-year-chart1Click to enlarge

While U.S. shipping volumes picked up nicely for Federal Express (FDX) in the quarter ended November 30, 2009, for example up 4% in their core express segment, overall revenue dropped 10% as price per package plummetted. Diluted EPS were off 30% from the year ago period.

FDX shares trade at 23 times management estimates for earnings this fiscal year and are up well in excess of 100% from its March lows.

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I hope this overview of seven bellwether companies reporting earnings in the last week has been useful in giving you some insight into what is really happening on the ground. I know it has been for me.

What the reports all show is a continuing tough operating environment, with stabilization and even some improvement albeit at much lower than previous peak levels. Price appreciation and valuation appear to have discounted most to all of the improvement at this point.

I wish everybody a Happy Holiday season and thank you all for your business and interest.

YTD Returns (through 12/18)

S&P: +22.06%

DJ Total: +24.96%

Top Gun: +6.99%