From 500K to 5K Feet: Retail Sales to Retailer Performances
The prior post (LT Business Cycle De-construction: Time to Pay the Piper), which we've left up for your browsing pleasure for a bit to let it really sink in, covered the long-term structural and secular trends in the economy as well as the current cyclic outlook. To re-iterate we think we're crossing a "tipping point" where a normal cyclic downturn is beginning, or has begun as a matter of fact. And that we'll see increasing economic weakness in the months ahead. A good bellweather of this is retail sales and retailers performance, which is what we'll focus on here. And take the opportunity to correct an early data manipulation error we made.
Real Retail Sales Re-visited
If you look at the accompanying chart it contrasts real retail sales in the updated, or revised, version verses the old one. In both cases we tried to estimate real retail sales ex-gasoline, which requires an estimate of real gasoline station sales which is NOT available. We found the "scissors-blade" where real sales dropped and gas sales rose to be extraordinarily surprising. Some of that surprise remains but the new data isn't as anomalous. Nonetheless the fundamental result remains. Originally the overal CPI was used but this time we found a specific, or at least more specific CPI, index to apply. Now Gas sales follow a more rational pattern but are still absorbing a lot of the consumers budget. In any case there's been a severe drop in real gas sales. And overall real sales turned down in the Fall and negative around Jan08. Last month it was down ~ 2% ! And gas is dropping like a rock. That's as good an indicator of "look out below" for Consumer Discretionary and Staples stocks as anything we've seen. As well as an indicator, at least IOHO, that a recession began during the holidays and is accelerating. From the general economic situation to real retail sales takes us from 500K to 100K feet of analytical altitude. Let's drop lower.
Retail Stock Performance
The next graphic is a Yahoo Finance tracking portfolio of key Retailer stocks which tells us whether or not that outlook is reflected in the market veiws. After the break you'll find a decent-sized collection of stories on earnings and outlooks which would strongly suggest that it does NOT. The other thing we'd suggest looking at is not just the daily changes, which are interesting for very short-term sentiment, but where those stocks sit in relation to their 50-day MA's and highs and lows for the year. TGT for example is above its' 50da and significantly below the year high while WMT, on the strength of its' relative performance (entirely earned IOHO again) is barely below it's high. LOW's is doing well and HD surprisingly so. Yet if our economic analysis is correct there are going to be some unpleasant surprises in store for all of these companies and their investors. The trick will be to sort thru them and find the good performers. Which in many cases means those who have re-thought their operations, strategies and execution. As WMT did and as HD is beginning to do, very well, when you dig into it. On the whole, however, we don't see that a reasonable view of the economic future is reflected in these prices. So if that takes us from 100K to 10K feet of altitude the next step is to get down as close to the ground as we can manage. Which requires examining each retailer in some detail - which is for some other time. Sears on the other hand has seen the penalities of substituting financial engineering for operational acument come full circle. Now that's a stock we'd steer well clear of for a long time to come !
Down on the Ground: Home Depot Example
But we can throw up one example in quick summary form. This next graphic is a composite from HD's last annual analyst presentation in which they outlined how they see the world, what they're doing about it and where they intend to go. Judging the whole (which you can collect from their web site btw) their grasp on the Housing market is enormously more realistic, the realize where they're broke and where they need to fix things and have a very good grasp on some key details, strategic initiatives and operational execution requirements. In other words we're very impressed, though now we all will see whether the charts are translated into store-level realities across the system.
This chart is a composite drawn from the CEO and CFO's presentations and shows, starting in the UL corner and moving clockwise, their outlook for Housing, and then their monumental re-think in how they invest their monies. Which represents as good a translation of business strategies and operational changes into financial strategies as we've seen. A major cultural change for HD in particular and American businesses in general. Think of it as a major indicator of sound corporate business practice. Followed then by store-level metrics that derive from their strategic and operational re-thinks but are translated into financial metrics. And finally overall strategic control metrics for major operating areas (and therefore initiatives).
The one metric we'd question is matching capital spending to depreciation. While financially sensible in the short-run, and likely dictated by conditions, this would be a time to invest judiciously in training, hiring, technology, logistics and all the other areas we outlined as strategic requirements. BtW - if you compare to our earlier assessment they hold up very well indeed (Six Steps to Prosperity: HD Initiatives to Consider,Performance Re-visited: Another Trip to HD's Woodshed). And compared to last summer have made a huge turn-around in their worldviews, which is vital.
The jury is of course out. And a huge amount of pain lies ahead because of the next two years of Housing problems as well as the general economic situation. Nonetheless keep your eye on HD ! And also think of this whole process as a way to approach business investment and performance analysis by linking top-down economic to bottom-up business analysis. In other words think of it as a model for the kind of analysis that Warren would be proud to see you do.
Strategic Outlook
Skies Darken For Retailing As Spree Fades A number of retailers expect same-store sales, or those at stores open at least a year, to begin decelerating. That could disappoint investors who were hoping for easy comparisons against last year's weak sales.Throw into this mix July retail-sales data, which the Commerce Department reports Wednesday morning. Economists on average estimate a decline of 0.4% after rising a meager 0.1% in June. Excluding the grim automobile sector brightens the picture considerably. Adjusting for inflation, however, turns it dark again. Retreating energy prices may help. But J.P. Morgan Chase's Charles Grom notes that consumer spending is correlated more with unemployment, which is rising.Moreover, a new Federal Reserve survey shows about two-thirds of the country's loan officers reported tightening standards for credit-card and other consumer loans in the past three months, the highest in the 12 years the Fed has kept track and far higher than in the 2001 recession. That could mean less spending of cash at the malls. Retailers are managing inventory better, which helps preserve profits, "but the back half of the year, and well into 2009 still look troubled," said Adrianne Shapira at Goldman Sachs. The trends will play out differently for various retailers, several of which report this week, including Macy's on Wednesday, and Wal-Mart, Urban Outfitters, Kohl's and Nordstrom Thursday. Warehouse clubs and discounters should do OK. Still, product mix is shifting to lower-margin goods, and, as Costco Wholesale recently noted, inflationary pressures are pinching profits even for low-cost leaders. Department stores didn't benefit much from the rebate checks and likely will continue hurting, analysts said. Specialty retailers that aim to stay in touch with ever-changing trends, such as Urban Outfitters, are expected to benefit from shoppers' continued inclination to splurge on occasion. But up to what point? Urban trades at a rich 33 times trailing earnings.
- Wal-Mart Earnings: Wal-Mart reports second quarter earnings. BNN speaks to Burt Flickinger III, managing director, Strategic Resources.
- Home Depot and Target earnings Markets will get a gauge of the resilience of the U.S. consumer when Home Depot and Target release earnings. David Abella, portfolio manager and senior equity analyst, Rochdale Investment Management, talks retail with BNN.
Key Retailers
Housing malaise eats into Lowe's net Lowe's Cos. said Monday that its second-quarter profit fell 7.9%, hurt by the housing market downturn, which cut into demand for cabinets, countertops and other big-ticket purchases. Results, however, exceeded analysts' estimates, thanks to strength in seasonal sales as homeowners restored lawns and outdoor landscaping after last year's drought in much of the country. The No. 2 home-improvement retailer also benefited from the U.S. government's stimulus checks, which aided its comparable sales by as much as 1.5 percentage points, more than it projected. It also gained unit market share at its fastest pace in eight quarters as many independent operators closed shops, Chief Executive Robert Niblock said on a conference call with analysts.Despite better-than-expected results, Lowe's third-quarter profit forecast missed analysts' estimates as the retailer expected a continued challenging housing market into 2009, especially in regions such as California, Florida and the Gulf Coast. It also said it is evaluating the number of stores it plans to open for next year in light of the current sales environment. It said it will announce the final number next month. Sales rose 2.4% to $14.5 billion as the company opened in more locations. Same-store sales, or sales at stores open at least a year, dropped 5.3%.
Home Depot's 2Q Profit Drops 24 Percent The Home Depot Inc., the nation's largest home improvement retailer, reported a 24 percent drop in second-quarter profit on Tuesday and reiterated its downbeat outlook for the year amid a weak housing market that shows no signs of recovery. The Atlanta-based company said net income fell to $1.2 billion, or 71 cents per share, in the three months ended Aug. 3, from $1.59 billion, or 81 cents per share, a year earlier. Sales fell 5.4 percent to $21 billion from $22.2 billion in the year-ago period. Same-store sales, or sales at stores opened at least a year, fell 7.9 percent. Same-store sales are considered a key indicator of a retailer's health. The results did beat the expectations of Wall Street analysts surveyed by Thomson Reuters, who projected earnings per share of 61 cents on revenue of $20.58 billion. "We continue to see pressure on our market and the consumer, generally," Home Depot's Chairman and CEO Frank Blake said in a statement. Despite the weak economic climate, he noted that the company saw improved execution in its merchandising and operations initiatives during the past quarter. Home Depot's business has been hurt by the sluggish economy and the housing slowdown, that's also battering its competitors such as Lowe's Cos. Inc. Lowe's reported Monday that its second-quarter profit fell nearly 8 percent, but managed to top Wall Street expectations as the nation's second-biggest home improvement retailer benefited from customers' efforts to repair last year's drought-stricken gardens, tight expense controls and better-than-expected sales. Lowe's offered a weaker-than-expected outlook for the third quarter, but raised its guidance for the full year.
- The Street :Home Depot Earnings & The Home Improvement How badly will Home Depot's earnings be hurt by the slump in U.S. housing? BNN speaks with Maureen Atkinson, senior partner, JC Williams Group.
Target Quarterly Profit Drops Target Corp (NYSE:TGT - News) reported a nearly 8 percent drop in quarterly profit on Tuesday as shoppers passed over trendy clothes and home decor in favor of everyday necessities, hurting its margins. The No 2 U.S. discount chain behind Wal-Mart Stores Inc (NYSE:WMT - News) said profit was $634 million for its second quarter that ended August 2, down from $686 million a year ago. Earnings per share rose to 82 cents from 80 cents, boosted by fewer shares outstanding in the quarter. Analysts, on average, had been expecting it to earn 76 cents per share, according to Reuters Estimates. The second quarter marked the fourth straight quarterly profit decline for Target as its shoppers, who once splurged on its cheap but chic cashmere sweaters or metallic handbags, pulled back on spending. Last week, Wal-Mart reported a 17 percent jump in second-quarter profit as bargain-hunting consumers scoured its stores for food, medicine and electronics. "Wal-Mart has staked out the position with its 'Save Money. Live Better' tagline ... that they are the king of low prices," said Craig Johnson, president of retail consulting firm Customer Growth Partners. To compete, Target needs to go beyond advertising its stylish merchandise and incorporate the message that "we'll save you money and we'll help your family make it through these economic times," he said. To improve results, Target has focused more on items such as food or medicine that bring shoppers in more frequently. It is also putting a bigger emphasis on the "Pay Less" side of its "Expect More. Pay Less." tagline. But Target has said it does not intend to significantly change its strategy due to the current economic climate. Target also said it saw soft sales trends in the quarter. Its retail sales, excluding credit-card revenue, rose almost 6 percent to $14.97 billion from $14.17 billion. Sales at stores open at least a year, a key retail gauge known as same-store sales, slipped 0.4 percent. Its second-quarter gross margin rate declined from last year, driven by faster sales growth in lower-margin merchandise, the company said.
Staples Warns on 2Q Earnings, Shares Lower Staples Inc. warned Tuesday that its second-quarter results, excluding its acquisition of Corporate Express, would be weaker than anticipated as American consumers pulled back on spending. The Framingham, Mass.-based office supply company said revenue rose about 3 percent and earnings per share fell about 15 percent in the quarter, compared to a year ago. At the end of the first quarter, Staples executives predicted that earnings per share would be flat in the second quarter. Staples said sales in North America were hurt by lower customer traffic and smaller orders, leading to a revenue drop of 1 percent as comparable store sales fell about 7 percent over 2007. International sales rose 17 percent, with a big boost from a weak dollar, and rose 6 percent when measured in local currency.
Saks Reports Wider 2Q Loss, Shares Tumble Luxury goods retailer Saks Inc. reported a wider-than-expected loss for the second quarter on Tuesday and delivered a downbeat forecast for the year as its affluent customers cut back on apparel amid a slowing economy. The New York-based retailer said it lost $31.7 million, or 23 cents per share, for the three-month period ended Aug. 2. That compares with a net loss of $24.6 million, or 17 cents per share, in the year-ago period. Revenue fell 3.5 percent to $669.2 million from $694.1 million a year ago.Thomson Reuters says that analysts it surveyed expected a smaller loss of 19 cents a share on higher revenue of $679.2 million. Saks said it expects its 2008 operating margins, excluding certain items, to decline from 2007 levels. It also expects same-store sales, or sales at stores open at least a year, to be anywhere from unchanged to down by low-single digit percentages for the second half of the year.
Strategic Re-thinkings
Engineering a Change at Wal-Mart Eduardo Castro-Wright took over as chief executive of Wal-Mart Stores Inc.'s U.S. stores division in 2005. The economy was relatively robust, but sales growth at the $240 billion unit was slowing as its rivals' surged. One solution the Bentonville, Ark., discounter tried -- luring higher-income shoppers with trendier fashions -- had flopped, eroding profit. Mr. Castro-Wright, an engineer trained at Texas A&M University, devised a three-year plan to overhaul stores marred by cluttered aisles and slow checkout lines. As Wal-Mart prepares to report fiscal second-quarter earnings on Thursday, the changes appear to be paying off. Its U.S. stores have beat or hit sales targets for the last six months, besting most of its competitors. Sales slowed somewhat in July, though, as the last of the federal tax-rebate checks were spent, and Mr. Castro-Wright noted that consumers are growing more cautious. The company's return to its low-price roots has been seen as a boon to consumers. But recent efforts to warn its work force about proposed legislation that could make it easier to unionize companies have given Wal-Mart's opponents new ammunition. Wal-Mart: $1 billion expansion in Brazil, Wal-Mart Earnings Analysis: Analysis of Wal-Mart's earnings, with John Lawrence, of Morgan Keegan
Tesco Sets Sights on India Tesco PLC, one of the world's largest retailers by sales, is joining forces with India's Tata Group to target the emerging Indian middle-class consumer market. U.K.-based Tesco announced plans Tuesday to invest about £60 million, or about $115 million, during the next two years to become the latest global giant to set up wholesale "cash-and-carry" stores in India. Current Indian regulations allow foreign retailers to invest here only through such wholesale outlets -- which sell to other businesses such as hospitals, hotels or other stores -- or through franchise and licensing agreements. Tesco has also agreed to put its expertise and technology behind the Tata Group's expansion into hypermarkets. For a fee, Tesco will teach Tata Group's retail arm, Trent Ltd., how to set up large retail stores and streamline its supply chain. Tesco has been expanding globally in recent years in an effort to diversify away from its home market in the U.K. The Tesco-Tata move comes at a time when many retailers are discovering that it isn't as easy as they hoped to make money in India. Some are scaling back expansion plans, and Indian consumers haven't been spending enough to sustain all the newcomers. Still, Trent has ambitious plans for its hypermarkets, which are called Star Bazaar. The company already has four outlets and plans to open 46 more stores in the next five years. "Through the wholesale agreement, Trent will gain access to the supply-chain infrastructure, which Tesco will set up in coming years," Trent Managing Director Noel Tata told reporters.