Consumer confidence is reported at 10am on Thursday with expectations for a decline after last month's big surprise to the upside. Last month's report, aided by the improving job market, surged to 70.3 from 61.3 in August. While the present situation index increased from 46.5 to 50.2, it was the expectations index that contributed significantly with an increase to 83.7 from 71.1 in August. While the upward trend is inspiring, the index regularly topped 100.0 before the recession and should have further to go with improvement in housing and employment.
The report follows closely on last weeks increase in the Michigan Consumer Sentiment Index to its highest since September 2007. The improvement was largely associated with lower gas prices, a stronger job market and higher property prices. The Expectations Index, a measure of confidence for future growth, increased as well and is a good sign for the holiday shopping season.
The market would not normally pay much attention to the confidence report from the Conference Board, after already having seen the Michigan Index. This week could be different and investors may want to position for another upside surprise due to stronger housing and employment reports over the last month.
A rising tide will not lift all retail
While a strong confidence report may boost expectations for the holiday shopping season, some names should outperform. The National Retail Federation expects sales to increase by 4.1% over the holiday season, more than a percent off the increase in prior years and the lowest growth since 2009. In contrast, online sales are expected to increase by 12% over last year to $95 billion. Retailers positioned in the online space will not only benefit this year but also as sales online, currently about 5% of total sales, continues to grow each year.
Few are better positioned in the online space as Amazon (AMZN) and its increasing number of fulfillment centers. The $108 billion behemoth reported an operating loss of $28 million for the third-quarter though shares rose on sentiment for higher future sales. The loss was largely attributable to a 28% increase in operating expenses as the company moves aggressively to open more fulfillment centers around the world and decrease shipping time. The price multiple on the shares has always confounded analysts, but the company continues to see high revenue growth and an increasing share price.
As for the company's Kindle and its ability to compete with new products from Apple (AAPL), sales of the new Kindle Fire surged to the highest since its launch after the announcement for the iPad mini. While Apple products will continue to perform well and demand a price premium, the new iPad was not impressive enough to overcome its high price point.
In fact, it was an interesting launch in that this is one of the few products where Apple is following others rather than leading product innovation. The mini was largely a response to smaller tablets released by other companies. It is understandable that Apple would want to protect its 37.4% EBITDA margin, but it risks customer attrition to other companies. I fully expect Apple to lower the price of the iPad mini before Black Friday. While the move will boost sales volume, investors will need to adjust their margin expectations and the net could be negative with Apple trading at less of a premium to other tech retail.
Best Buy (BBY) has been trying to position itself in the online space by matching competitors deals as its brick-and-mortar stores face declining sales. The company is expected to report $10.7 billion in revenue on November 20th versus $11.3 billion in the same quarter last year. Earnings are expected to come in at $0.17 per share, more than 63% lower than the comparable quarter. The shares had been bid up temporarily after former CEO Schulze expressed interest in taking the company private but have since fallen to a new 52-week low. Schulze is expected to present his offer to the board soon but recent management changes seem to relay that the company wants to continue on its current path. Investors may see some upside in a quick options play on news surrounding a takeover. Unfortunately for investors, Best Buy has neither the online presence of Amazon nor the brand loyalty of Apple.
I highlighted Coach (COH) on October 15th as a great play in the apparel sector on valuation and brand strength. The shares are up 4.1% since then but still have upside potential on growth in emerging markets. The company reported earnings of $0.77 per share last week on sales of $1.16 billion. North America and China continue to see good sales and the company recently completed its acquisition of retail businesses in Korea and Malaysia. The company's operating margin of 31.7% is above peers in the group while the trailing price-earnings of 15.3 is well under the industry average of 20.5 times. The shares also pay a dividend yield of 2.23%, strong for a retailer.
While the Gap (GPS) may have a comparatively strong brand in its flagship, Old Navy and Banana Republic stores, the shares have doubled over the last year and the price multiple has crept up to 20.2 times trailing earnings, well above the five-year average of about 15 times. The operating margin of 10.3% is about average for the group and a 1.4% dividend yield does not make up for the possibility of overvaluation in the shares. In a possible sign that top management is not happy with the company's direction, the Gap recently announced more changes to executive leadership. The company's share buyback program of $1 billion should help to support the price but investors may want to look for better value.
While forecasts for the holiday shopping season are still slightly below recent years, improving consumer confidence could start to build momentum and lead to a surprise in sales. While a strong season will support the sector, investors still need to be selective for value and growth within the space.