Polarization of Retail

Includes: M, TGT, WMT
by: Todd Sullivan

There are three classes of retail. The high end (specialty) that will be hit or miss, the middle that will suffer and Wal-Mart (NYSE:WMT) that will prosper.

Specialty and high end retailers will either crater like Abercrombie & Fitch (NYSE:ANF) or Tiffany's (NYSE:TIF) or have same store sales that drop dramatically but due to a 50% store count increase hold profits flat like True Religion (NASDAQ:TRLG). This area due to the smaller size of the participants will produce wildly erratic results.

In the middle, Sears Holdings (NASDAQ:SHLD), Target (NYSE:TGT), Macy's (NYSE:M) and JC Penny (NYSE:JCP) among others, are experiencing large declines in same store sales (high single to double digit falls). These retailers are viewed currently as essentially different versions of each other and in a poor climate, share the same fate to slightly differing degrees. Now, their individual eventual fates will be the result of management's stewardship of finances but as far as sales go, they are in the same boat. Those with the strongest balance sheets will survive and be stronger at the end.

Don't be surprised if Macy's files Chapter 11 this year. Aside from falling sales, the company has $1.3 billion in cash, a $3 billion market cap and over $9 billion in debt... these numbers cannot hold. Right now the interest expense ($560 million) on that debt is over 50% of last year's operating income. One has to expect income to fall more this year... the bad news is the debt interest won't.

Then there is Wal-Mart:
Wal-Mart Stores reported a strong surge in February sales Thursday that trounced analysts' expectations, citing falling gas prices for helping boost its discount customers' shopping budgets.

Wal-Mart, the world's largest retailer, said same-store sales, or sales at its stores open at least a year, jumped 5.1% last month. That was more than double analysts' estimates for a 2.4% increase, according to sales tracker Thomson Reuters.

Wal-Mart last reported a same-store sales gain over 5% in June 2008, when its sales increased 5.8% on the back of robust back-to-school merchandise sales. The retailer said same-store sales at its Wal-Mart stores rose 5% and increased a stronger 5.9% at its Sam's Club warehouse clubs. Net sales for the month rose 2.8% to $30 billion.

"We exceeded our own expectations for the period," Eduardo Castro-Wright, vice chairman of Wal-Mart Stores said in a statement. "We believe falling gas prices significantly boosted household disposable income in February and therefore allowed for both more trips and more spending towards discretionary categories."

Wal-Mart is the clear winner. Just drive through your town. Where I live the Wal-Mart and the Target (TGT) are across the street from each other. Look at the parking lots. I can pull up to the door at Target. At Wal-Mart? I bundle up for the long walk to the door.

Retail will turn, though not likely until the fall at the earliest. There will be more casualties and that is perversely good, weeding out the weak ones. Until then, Wal-Mart is the winner and the rest will fight for survival...

Disclosure: Long WMT, SHLD