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Summary

  • Extreme weather impacts will not last forever. Many companies like Kohl's and Home Depot suffered losses from the frigid weather.
  • FRAN's CEO said that business was hit by 370 full and partial daily boutique closings during January due to extreme weather conditions.
  • BBBY says severe weather led to 464 times a store was closed for a full day and 1,923 times a store was closed for a partial day.
  • One-time incidents like weather storms will eventually provide opportunities for contrarians.

The snowstorm that ravaged North America kept people indoors and hurt many retailers hard. The Artic vortex that went south and stayed there made a mess for the people who could go out for shopping. Companies like Amazon (NASDAQ:AMZN) and Google (NASDAQ:GOOG) had spike orders from the people who were trapped indoors. Retail business was stunned. Everything sounds awful. So why should you bet on the retailers hit by severe weather?

  • Extreme weather events can't last forever.

The coldness we experienced wasn't the worst in history, but it did last very long. This severe coldness is unlikely to happen every year as we know that the warm Atlantic ocean currents which could bring more heat to the North Pole don't change their path constantly. (Atlantic ocean current change could make summers hotter.)

  • Extreme weather events usually amplify anxiety and fear.

Was the weather really so cold that we couldn't even get out? We had not experienced anything "cold" before this "real" winter came. The average temperature was not so unbearable. Thanks to the fickle media, we read scary titles that made our bodies cooler than they actually were.

  • Extreme weather events bring down the retail business.

Many retail companies have said that the frigid weather impacted their businesses. Kohl's (NYSE:KSS) warned of Q4 troubles after weather problems. Home Depot (NYSE:HD) estimated a $100 million loss caused by cold weather. Although we know that these earnings impacts were temporary, the market punished the companies that missed their earning estimates anyway.

I have followed a few companies that had suffered earnings misses due to the chilliness.

FRAN

Francesca's Holding Corp. (NASDAQ:FRAN) declared its earnings report for Q4 2013.

Traffic and margins slide at Francesca's

  1. Francesca's Holdings : Q4 EPS of $0.27 misses by $0.02.
  2. Revenue of $92.1M (+6.2% Y/Y) misses by $2.23M.
  3. Francesca's saw margins deteriorate by 280 bps to 50.6% in FQ4 as traffic was soft.
  4. Comp sales fell 6% during the period.
  5. The retailer warns that the negative trends it saw in January have extended into the current quarter.
  6. The company sees EPS of $0.20-$0.24 in FQ1 vs. $0.28 consensus.

As a result, FRAN plunged more than 15% after its earnings report.

Francesca's CEO Neill Davis said:

Sales results for the fourth quarter were below our revised guidance driven by the impact of 370 full and partial daily boutique closings during January due to extreme weather conditions.

FRAN's comparable sales are expected to be in a range of low negative to low positive single-digit for 2014 fiscal year period compared to minus 2% for the 2013 fiscal year comparable sales.

FRAN's business was challenged by competitions. I am surprised comparable sales fell hard during the period even with lots of stores closed down. FRAN's business model allows it to quickly expand and quickly follow the unpredictable fashion trends. In theory, FRAN should be able to do well expanding its business along with excellent comparable sales growth. Stephen Simpson's article explains this situation well.

FRAN opened 91 news stores and remodeled 30 stores in 2013. FRAN now expects to open another 85 new stores and remodels up to 50 stores in 2014.

FRAN is trying to remodeling its current business. Thanks to the size of their stores, FRAN has the ability to quickly change or modify its merchandise by sacrificing limited amount of sources and time. New stores openings and merchandises with high profit margins may mitigate possible weather and margin impacts. In addition, the board reveled that it may repurchase shares further into 2014.

What I am trying to say is that the Q4 2013 earnings report was influenced by the cold weather. The punishment by the market was probably unjustified.

After the adjustment, the 2014 estimated EPS for FRAN is about $1.22 per share. Revenue growth rate is expected to be around 15%.

My opinion for FRAN is that its earnings will improve for the second half of 2014; its fair valuation should be around $23 - $25. ($1.22 X 20 = $24.4) A P/E of 20 is given here to reflect possible earnings improvement.

BBBY

Bed & Bath Beyond (NASDAQ:BBBY) revealed its Q4 2013 earnings reports on March 7, 2014.

Bed Bath & Beyond guides FQ4 lower, blames bad weather

  1. Bed Bath & Beyond cut its FQ4 outlook after it said severe weather led to 464 times a store was closed for a full day and 1,923 times a store was closed for a partial day.
  2. Forecasts FQ4 (March) EPS of $1.57-$1.61 vs. prior guidance of $1.60-$1.67 and analyst consensus estimate of $1.65, and sees comparable store sales up 1.7% vs. previous guidance of 2%-4% gains.
  3. Bed Bath & Beyond estimated that the winter weather reduced its earnings by 6 to 7 cents per share for three-month period that ended March 1. It expects to earn $1.57 to $1.61 per share for the quarter, down from its prior forecast of $1.60 to $1.67 per share.

Bed & Bath Beyond is another company that I have followed for years. I admire BBBY's business model and position since it's the biggest player in the sector, which means smaller players cannot threaten BBBY's business directly. BBBY has splendid historical financial stats and operating efficiencies. Its EPS has been growing consecutively since 1993. (Except for the 2008 financial crisis, the EPS for that year stayed flat.)

There is a voice that Amazon may threaten BBBY's business by offering similar products. Because of the severe coldness, many customers stayed at home and did most of their shopping online. The storm helped Amazon supporters.

Indeed, many shoppers were shopping on Amazon during the winter. I have noticed that BBBY only adjusted down its guidance for the next quarter by 3.5% (estimated EPS is down to $1.61 from $1.67). Thanks to the bad weather conditions, the board was finally aware of the weakness in its online distribution channels. Investing in online channels is BBBY's priority now.

Some people are concerned that customers will shift their loyalties to Amazon gradually. Similarly, people are concerned that PetSmart (NASDAQ:PETM) will lose its business to Amazon. Well, we must realize that there is an element of exaggeration in the case of how well Amazon could beat up conventional retailers. PETM proved that it can do well under the threat of Amazon by beating estimates consecutively. BBBY, on the other hand, as the biggest player in the sector, has the resources to fight off Amazon.

We know that shopping experience is the key to retailers, which help customers to enjoy the process of purchasing products. Amazon's shopping experience is incomparable to other smaller sites like ETSY or ASOS in my opinion because Amazon doesn't have the resources to lift their shopping experience for every sector yet. Besides, BBBY has more variety than Amazon.

BBBY has made several important acquisitions such as Linen Holdings and Cost Plus to strengthen its market shares. BBBY's main goal for the year is to invest in its IT department to catch up with the cyber-shopping trend. We know that the weather impact is most likely a one-time incident which is unlikely to make its damage exactly the same as last time. When the clouds fade away, customers will visit retail stores again. Recent prejudices will be gone.

BBBY's estimated EPS for 2014 and 2015 are $4.8 and $5.28 respectively.

Estimated Revenue growth for 2014 and 2015 are 5.6% and 4.8% respectively.

BBBY has no debt with more than $1 billion cash or cash equivalent items and short-term investments.

My evaluation for BBBY is $5.28 X 15 = $79.2. A share price around $80 is fair.

Conclusion

One-time incidents are the kinds of opportunities that the market occasionally produces for contrarians. I have had investments in these opportunities throughout my career and they have turned out to be good fortunes. For example, LXU Industry had an explosion that hit one of its major factories, where the damaged area only affected less than 5% of its overall business. However, the market was driven by fear. People were busy dumping LXU's shares rather than taking a close look first.

There are other retailers that have taken impacts from the coldness this year. (NASDAQ:LNDC), (NASDAQ:TFM), and (NYSE:LB) are my potential picks. For those of you who like to play contrary investments, you may have a best year ahead of you.

Source: The Cold Weather Was A Short-Term Headwind For These Retailers

Additional disclosure: I may initiate a long position in BBBY over the next 72 hours.