Today's Market: Mixed Story In Retail

Includes: BBY, GPS, HD, JCP, LOW
by: Matthew Smith

Try not to let the article title fool you because a mixed story in retail is actually an improvement and continues this trend of brighter outlooks in retail. The trend is not yet apparent across the entire spectrum of retailers, but we are beginning to see green shoots even in hard hit subsectors of retail. It appears that we are finally seeing the tide that will lift all boats, although we are still in the early stages of this move.

The numbers and guidance from names such as Gap (NYSE:GPS), Home Depot (NYSE:HD) and J.C. Penney (NYSE:JCP) tell us as much, however the latest quarters put in by Best Buy (NYSE:BBY) and Lowe's (NYSE:LOW) demonstrate the need to continue to be wary of going all in on individual names. We still like our idea to allocate most of one's retail exposure to ETFs in order to gain the diversification, but admit after some of the recent economic data and quarterly results that portfolios will need to be positioned to take advantage of some of these individual stories as the consumer returns to the malls.

Chart of the Day:

(Click to enlarge)

Source: Yahoo Finance

We have economic news today and it is as follows:

  • MBA Mortgage Index (7:00 a.m. EST): Est: N/A Actual: -2.3%
  • Retail Sales (8:30 a.m. EST): Est: 0.1% Actual: 0.4%
  • Retail Sales - Ex Auto (8:30 a.m. EST): Est: 0.1% Actual: 0.2%
  • CPI (8:30 a.m. EST): Est: 0.0% Actual: -0.1%
  • Core CPI (8:30 a.m. EST): Est: 0.2% Actual: 0.1%
  • Existing Home Sales (10:00 a.m. EST): Est: 5.20M Actual: 5.12M
  • Business Inventories (10:00 a.m. EST): Est: 0.4% Actual: 0.6%
  • Crude Inventories (10:30 a.m. EST): Est: N/A Actual: 0.375M
  • FOMC Minutes (2:00 p.m. EST): Est: N/A

Asian markets finished lower today:

  • All Ordinaries -- down 0.85%
  • Shanghai Composite -- up 0.62%
  • Nikkei 225 -- down 0.33%
  • NZSE 50 -- UNCH
  • Seoul Composite -- down 0.71%

In Europe, markets are trading lower this morning:

  • CAC 40 -- down 0.30%
  • DAX -- down 0.08%
  • FTSE 100 -- down 0.21%
  • OSE -- down 0.52%

Retail Turning Positive?

The numbers from JC Penney left a lot to be desired as the company missed by a hair on the revenue figure and had EPS figures which missed badly - even with their secondary having diluted shares a bit. There was one good piece of news regarding forward guidance that the CEO discussed and that was the early numbers from November which the company has found to be encouraging. This is not a name we find compelling in any way right now. Sure one could buy now and probably make some money down the road, and good money too, but there are too many other names out there in the retail sector right now which have far better businesses right now that could return just as much if not more to investors and possess only a fraction of the risk. We would stick to those other names as JC Penney works to simply get back to where they were three years ago, and as many readers will recall that place was not all that great.

Apparel has been a tough area for investors to find performance, but the one bright spot had been Gap. Look for outperformance versus the peer group during the holiday season, even though many are expecting competitors to make inroads.

(Click to enlarge)

Source: Yahoo Finance

The two true winners which have continued to show strength in their operating numbers and guidance are Home Depot, which reported yesterday, and Gap. The home improvement warehouses have been doing quite well as housing has come out of its correction but Gap has been something of an anomaly in the retail sector because the apparel retailers have struggled to bring consumers back and get them excited about their goods. The outlier has been Gap as all three of their branded stores have outperformed key competitors and powered Gap's shares higher. These two names have been big winners over the past few years and shall continue to be as investors are drawn in by their outperformance versus peers.

Which is where Lowe's and Best Buy come in. Both have seen their businesses improve from their respective bottoms but after strong runs have seen some headwinds develop in the last quarter. The most recent quarters could simply be hiccups, but it appears to us that at least in Lowe's case that we might be seeing something more serious developing. The company has trailed Home Depot for some time as the execution has been lacking and the consumer has been slower to return versus the contractors, who overwhelmingly use Home Depot. Best Buy has shifted its focus in recent quarters to streamlining stores to better suit local markets and focusing on higher margin items. The price match guarantee to combat "showrooming" was a key event but if Lowe's is correct and the appliance business is getting heated then everyone will see margins contract and that will impact all three names, but obviously Best Buy to a lesser degree.

We expect some downgrades due to the light guidance provided by Lowe's and the disappointment some analysts will feel when comparing the company's numbers to those of Home Depot. It will be interesting to see if this negative sentiment will be able to break the uptrend in the chart.

(Click to enlarge)

Source: Yahoo Finance

Right now our concern lies with Lowe's as it now appears that the company is in for a round of analyst downgrades with their weak full year guidance when compared to analysts' expectations. We would stay clear of the name until the firing squad is done taking their shots and then would let the dust settle. Lowe's has been riding a rising tide but now execution is key as the easy gains have been had - and it is execution where the company has been lacking we would point out. Yes the comps are still good, but they have trailed Home Depot's for over 2 years and market share is being lost. These trends need to reverse and reverse quickly.

There will be a time to begin to pick the winners and losers on a broader scale than we have been doing, but right now it is hard to like any other names outside of the few we have been highlighting in our articles that seem to be hitting on all cylinders. Out of this group we think the only clear buy is Home Depot with Gap being a possibility for those looking to add a little bit more risk/reward to their portfolios.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.