Things that Make you Go, Huh?
8/11/2011
Who said department stores were boring (aka relics of yesteryear) places to consume non-essentials and as an analyst, dissect quarterly earnings reports? Certainly not this childhood Sears shopper and now resident stock market handicapper! In the matter of two days we have received two earnings reports from the leading department stores, Macy's (M) and Kohl's (KSS), which defy the conventional wisdom held on numerous fronts: 1. Consumer spending by middle-income to upper middle-income households is as dry as the Sahara. Selectivity is key when picking retail stocks in the current volatile environment. For as solid as the earnings reports were from Macy's and Kohl's, when I hear Family Dollar (FDO) blame the paycheck cycle for its poor sales (likely to hear this from Wal-Mart next week also) and see units per transaction weaken at specialty apparel retailers clearly all is not completely fine and dandy for many households across the country. That being said, there are some things going on here with respect to second quarter retail earnings overall. Getting granular... * Management teams sparked hysteria on the margin outlook on their 1Q11 earnings calls. Can't blame them, visibility on costs was minimal, but it looks like they assumed disaster scenarios...and the analysts bought it hook, line, and sinker. Shares of Macy's and Kohl's trade on roughly equivalent forward P/E multiples; 8.4x for Macy's and 8.7x for Kohl's. I continue to think if one is inclined to jump into consumer discretionary currently, the stock of the targeted company must be deeply discounted and have a strong investment thesis. Macy's fits the bill better than Kohl's. Macy's is managing its inventory in a stronger manner than Kohl's, is aggressively paying down debt, and continues to raise its fiscal year guidance due to momentum behind fundamental drivers, instead of share repurchases as is the case at Kohl's. Tale of the 2Q Tape: Macy's vs. Kohl's Same-store sales: Gross margin: Inventory: Guidance:
Brian Sozzi
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