by Brian Sozzi
By far, the influence of Mother Nature on retailers in January will dominate the discussion upon the same-store sales releases later this week. The onset of a full-fledged snow assault couldn't have arrived at a worse time for the nation's retailers, which broadly enjoyed a better than expected holiday season performance (online consistency plus November buying splurge). When the books are officially closed on the holiday quarter, I think it will go down as one that benefited from November consumer indulgence after a year of saving followed by the evaporation of good vibes as weather conditions soured in December/January.
Northeast: Ground Zero of Mother Nature's Wrath
November's surprising sales performance by retailers had the effect of leaving many lean on inventory of cold weather gear in December and January. During my mall tours throughout January, teen apparel companies had the unfortunate circumstance of displaying brightly colored t-shirts and woven tops. This is how the retail sector continues to operate; supply has to be bought months in advance, and retailers are quick to move wear-now product to showcase their new spring deliveries post holiday. Thoughts on the weather and how it impacted the Northeast include:
* Delayed mall openings.
* Parking lots turned into winter wonderlands.
* Shifted consumer spending to blowers, shovels, salt, and heating oil/natural gas instead of a pair of pants and a t-shirt.
* Likely caused a delay in gift card redemptions as consumers waited for juicier discounts on spring arrivals in February.
* Retailers perhaps entering the first quarter with inventory above plan, which in turn will require unplanned markdowns and cause risk to consensus earnings forecasts.
Overview of Exposures
* American Eagle Outfitters (AEO): about 31.0% of store base in NE storm areas.
* Abercrombie & Fitch Co. (ANF): about 33.0% of store base in NE storm areas.
* Aeropostale (ARO): about 30.0% of store base in NE storm areas.
* BJ's Wholesale Club (BJ): about 84.0% of store base in NE storm areas.
* Hot Topic (HOTT): about 28.0% of store base in NE storm areas.
* Pacific Sunwear (PSUN): about 25.0% of store base in NE storm areas.
* Target (TGT): about 27.0% of store base in NE storm areas.
* Urban Outfitters (URBN): about 26.0% of store base in NE storm areas.
Winners & Losers
* Teen apparel companies (losers): Very spring clothing and accessories dominate. Aggressive promotions in December led to minimal carryover of wear now winter apparel.
- Defying this trend (winner): Abercrombie & Fitch (ANF), which had somewhat of a presence in coats and sweaters in January.
* Select big box retailers (losers): BJ's Wholesale has its entire store base parked on the East Coast, while Target has exposure to the Midwest and the Northeast. For each of these companies, the weather may have caused consumers to focus on food as opposed to the margin enhancing discretionary departments, such as apparel and home.
- Defying this trend (winner): Costco (COST) and dollar stores in my view bucked the trend. For Costco, it has a strong presence on the West Coast and a supply chain that I think allowed it to have wear-now product in storm riddled NE store locations. As for dollar stores, these chains are located more in urban areas; in other words the stores are closer to the consumer. Consumers may have avoided a trip to a box box center and did fill in shopping at dollar stores.
* Boot makers (winners): Columbia (COLM) and Timberland (TBL). These companies invested in inventory for the holidays, and it was a wise decision in hindsight as product was available post holidays. Columbia reported a strong earnings beat last week, and we expect Timberland to do the same shortly.
Stocks mentioned/Other Notes:
S&P Retail Index: up 0.7% in January after +4.1% in December
Most of stocks mentioned below underperformed S&P Retail Index in January and broader market averages
* American Eagle Outfitters (AEO): stock flat in January
* Abercrombie & Fitch (ANF): stock down 13.8% in January
* Aeropostale (ARO): stock flat in January
* BJ's Wholesale (BJ): stock down 8.3% in January
* Hot Topic (HOTT): stock down 14.5% in January
* Pacific Sunwear (PSUN): stock down 25% in January
* Target (TGT): stock down 10% in January
* Urban Outfitters (URBN): stock down 5.7% in January
* Costco (COST): stock down 1.4% in January
* Columbia (COLM): stock flat in January
* Timberland (TBL): stock up 8% in January