by Brian Sozzi
To quote singer Vanessa Williams, retailers undeniably "saved the best for last." Basically, "wow" sums up my take on the January numbers. Not only did retailers trounce consensus forecasts, a replay of November, but 4Q EPS guidance ranges were moved higher. Retailers came into the month with mediocre momentum after the November binger, low expectations for sales, and an analyst community that held reservations. Having tempered comp forecasts was not absent good reasons. Comps slowed in week four of December, the ICSC/Goldman chain-store data printed negative growth rates throughout the month, and darn near weather of epic proportions caused delayed mall openings and inconsistent traffic patterns in the Northeast and Midwest. So what is exactly the deal with these numbers today? Are they an anomaly? Are they indicative of "underlying strength" in consumption as suggested by Macy's (NYSE:M) CEO Terry Lundgren (remember, November and January bookended a soft December)? A few explanations for the upside comps...
1. When the consumer ventured out in the Northeast and Midwest regions, they made it a point to consume. Browsing was not in the cards. Why waste a trip to the mall or big box center if the next day calls for 20 inches of snow? If consumers decided to get down and dirty with the snow, it looks as if they dipped into savings to compliment the gift cards received for the holidays. The results from Costco (NASDAQ:COST) underscore the stock up consumer mentality of the month, while a +24% comp by Limited Brands (LTD) suggests consumers made their trips to the mall worthwhile.
2. I mentioned the West Coast as an area of attention in a preview note. To that end, numerous retailers acknowledge that the West, where weather was generally dry, boosted the monthly performance.
3. Online sales were once again stellar, either at department stores or specialty retailers. Sales in this channel are higher margin relative to brick and mortar, and the sales strength here is one reason why EPS guidance was marked up. For the retailers that managed to have wear now product in the stores, it was an added margin opportunity.
Net net, January was indeed a final holiday gift for retailers in what was a better than expected period. I think January demonstrates there is underlying strength in consumer spending, confirming that November was no fluke. The spending power exists if there is a call to arms, such as Black Friday creep in November or Mother Nature ugliness in January, which led to a stock up now mentality. That said, let's not completely disregard December as I still think it was a wakeup call that consumers will make snap decisions in their budgets if they perceive economic conditions worsening.
- Negative weather impact of 1% to 3%.
- Most retailers beat January comp forecasts.
- Aeropostale (NYSE:ARO), Gap (NYSE:GPS), LTD, J.C. Penney (NYSE:JCP), and Kohl's (NYSE:KSS) all raised guidance for 4Q. American Eagle Outfitters (NYSE:AEO) expects EPS at the high-end of its prior guidance.
- Inventory appears to be clean entering 1Q.
- Inflation in food persisting.
- Average unit retail prices continue to be pressured; this must be reversed to a degree ahead of product inflation.
- Success realized in higher ticket categories.
Excluding a recent upgrade to buy (stock shed 20% since my December 7 downgrade, and valuation swung back to favorable) on Ann Taylor (NYSE:ANN), I did not change any ratings in January. In attempting to play the same-store sales game, I recommended in my preview note on the website to short Gap (GPS) and American Eagle (AEO), and to go long Abercrombie & Fitch (NYSE:ANF) and Costco.
Gap beat on comps, driven by a very nice month at Banana Republic, surprising in the sense the product was bland by and large. The comp will not be the headline grabber today, instead a material raise in FY10 EPS guidance that was fueled by share repurchase activity. I find the announcement to be odd as the market heard from Gap twice this week. First to announce the departure of Marka Hansen as Gap President, where FY10 guidance was reiterated, and second to announce the new brand President the following day. The comp printed at -6%, but enough left over holiday merchandise must have been cleared at good margins, and along with share repos, triggered the guidance raise.
Abercrombie & Fitch was a comp disappointment, underperforming peers in the month, owing to Hollister, which despite a solid promotion must have fallen out of favor with weather being so cold (surfwear...not in demand?). Moreover, the abercrombie kids division had another spotty performance. The stock opened up slightly higher yesterday, benefiting from the sector's overall showing.
Costco had the strongest month from the big box realm. The sales were solid in most merchandise categories, and the headline got a boost from the weak U.S. dollar.
I continue to rate Gap and Abercrombie & Fitch at buy ratings, and American Eagle a hold for institutional clients for purposes of our inclusion in consensus forecasts.
BJ's Wholesale Club
Finally, BJ's Wholesale (NYSE:BJ) management went public with what we already knew. The company is up for sale and has hired Morgan Stanley (NYSE:MS) to explore strategic alternatives, which may include gussying up the company for Leonard Green or to roadshow it to other suitors. The stock was significantly higher yesterday morning as making the sale public hints at a bidding war. I continue to rate the stock a buy.