By Brian Sozzi
Far from forgotten by the institutional investors holding shares in them, there is a list of retailers that the Average Joe in the markets has likely forgotten about this year. The explanation: monthly same-store sales reports have gone away for names such as Abercrombie & Fitch (ANF), Aeropostale (ARO), Pacific Sunwear (PSUN), American Eagle Outfitters (AEO), Wal-Mart (WMT), and shortly Hot Topic (HOTT) and Gap (GPS). Without monthly glimpses into the direction of sales in a boom and bust type consumer spending recovery, an investor is left to performance chance, provided he/she doesn't have a phone number to the key executives making the decisions at the names just mentioned.
Essentially, select retail names go underinvested in as the risk reward scale is tipped to "too much risk." For example, a top-selling sweater style at Gap in November, may be so hot that it's out of stock for a number of weeks in select colors and sizes, which would hinder sales growth the following month. No monthly sales reports, no real indication on trends other than to wait for the quarterly earnings call and then strive to performance chase if the quarter is sound or take a hit in the account if the numbers disappoint. I think management needs to do a much better job of articulating their visions for the company, while at the same time signaling intra-quarter trends. To provide strong granularity into a business on a monthly basis and then yank it away is detrimental, in my view.
- Excluding Abercrombie & Fitch shares, which have appreciated 27% year to date as management has done a good job of signaling quarterly trends to investors through presentations, ARO, PSUN, AEO, and WMT are down an average 20.1%. The past couple of earnings reports/conference call calls from these companies have been dour, leaving the market to assume little fundamental improvement. The S&P Retail Index is up 7.6% year to date.
- July quarter ended EPS estimates for WMT, AEO, PSUN, ARO (even ANF) have gone basically unchanged since late May, when 1Q11 earnings were announced. Consider the inflation and consumer related economic data since... (negative)
I continue to have a sell rating on Wal-Mart despite the stock trading at 12.5x forward earnings and sporting a 2.7% dividend yield at the moment. The reason goes like this: in order to justify a higher multiple and a shift upwards in my earnings assumption, there has to be a trigger either economically or internally (better running of the business). Instead, this is what I see:
- Dollar stores Dollar General (DG) and Family Dollar (FDO) print strong same-store sales recently (suggests Wal-Mart still not receiving fill in visits between paycheck periods).
- Target (TGT) continuing to struggle selling anything that could be deemed discretionary.
- Family Dollar reiterated Wal-Mart's declaration of a pronounced paycheck cycle, where low-income consumers err on the side of caution.
- Gross margin misses at Dollar General and Family Dollar due to inflation and weak seasonal sales.
- Walmex June same-store sales fall shy of consensus.
- Wal-Mart focusing on price match in the U.S. and global everyday low price initiatives (margin unfavorable).
- Challenging market conditions for Wal-Mart's Asda UK business.