Sponsored Link:
Retail Services
The Smart Profits Report: Issue #473
Wednesday, November 14, 2007
Retail Services: Here’s What To Expect In The Retail Sector’s Most Critical Two Months
By Marc Lichtenfeld
Senior Analyst, Mt. Vernon Research
There are few things I enjoy less than going to the mall. It’s right up there with a visit to the doctor, hearing my young children whine, and eating bad meatloaf. So you can imagine my glee this weekend when my wife informed me that the whole family was going to the mall to run some errands.
However, unlike most men who share my misery and sit forlornly with their wife’s purse as they wait for her to emerge from the dressing room, I try to use the time productively. I conduct what is known in the business as “channel checks.” A channel check is simply retail lingo for observing activity and trends within retail services.
While I’m waiting for the missus, I look at the number of shoppers, employee activity and the layout of the store. Sometimes, I chat with staff in order to get a read on where business is brisk and which stores need to hear the register ringing more often.
Then, next time I’m in the office, I conduct further research into the retail service to see if what I witnessed is a trend in the company and/or sector, or if it’s just an anomaly. And at this time of year, retailers depend on a heavy flow of feet into their stores more than any other time. The November-December holiday season period is without doubt the most critical period for the retail sector, since companies rely on it for about half their annual revenues.
Higher Prices Squeeze Consumers… Lower Prices Squeeze Margins
Based on what I saw, shoppers are still around. Yes… gasoline, energy and food costs are rising and the purse strings may be tightening as a result, but customers haven’t shut off the tap completely. They’re just searching harder for sales, and retail stores will have to compete fiercely to lure in the bargain-hunters. But shifting stock at lower than desired prices could squeeze profit margins.
I’m not just talking about clothes retail services here. I suspect the casual dining and restaurant segment will suffer worse than fashion retailers this season. Rising energy and commodity prices combined with a stretched consumer makes it tough to grow margins and profits. And stretched consumers will give up a meal at Red Lobster before denying little Timmy a merry Christmas. I believe IHOP (NYSE: IHP) and Darden (NYSE: DRI) are particularly vulnerable.
Let’s take a look at a few other Main Street retailers…
Nordstrom Retail Services Heading North
Nordstrom (NYSE: JWN): If the store that I visited is any indication of the broader trend for the company, then it will do well this season. The store was packed. Usually, there is a pianist playing classical music, but they swapped mellow for mashing this weekend as a DJ spun lively tunes that gave the store a festive atmosphere. The cosmetic counter was particularly crowded.
The thing about Nordstrom is that it caters to an already-moneyed crowd that should feel less impact from rising gasoline, home energy and food prices. After all, the customer driving her BMW 3 Series Sports Coupe probably isn’t all that concerned with $3 gas. She’ll still make the trip to Nordstrom, which is known for excellent customer service.
Nordstrom’s earnings are expected to grow 8% this year.
On the other side of the coin…
Empty Stores… Empty Registers… And A Bleak Winter For This Firm
Dillard’s (NYSE: DDS): Nordstrom’s prospects couldn’t contrast more with Dillard’s. You could have shot a cannon through the store I was in without inflicting any casualties. In fact, it might have livened up the place. The store was so dreary with drab holiday decorations stuck back in a faraway corner of the store, you’d never know it’s supposed to be the most wonderful time of the year.
Don’t get me wrong, I find it a bit ridiculous that holiday decorations are up before the Halloween pumpkins have gone soft. But consumers want to shop in a store that’s bright and energetic. Dillard’s wasn’t. Same-store sales in October slumped by a disastrous 7%, extending the chain’s already rough year - and it looks like a lean holiday season is on tap.
The fresh downturn comes after a solid merchandising effort revived the struggling retail service’s fortunes over the past few years, despite gloomy forecasts that wrote the company off for dead. However, it now appears to have plateaued. Earnings and sales are expected to be down this year and flat next year.
I believe rising prices and the sharp slowdown in the housing market will make it a tough quarter for retail sector stocks in general. But I expect Dillard’s to be hit especially hard.
Now for a potentially “hot” play…
Retail Services Fighting For Fickle Teens
While out and about, I was surprised to see perennial retail loser Hot Topic (Nasdaq: HOTT) crowded with customers. Facing fierce competition from the likes of Pacific Sunwear (Nasdaq: PSUN), Aeropostale (NYSE: ARO), American Eagle (Nasdaq: AEO) and Abercrombie & Fitch (NYSE: ANF), this teen retailer has endured its share of woe over the past few years. Its stock has tanked by 76% over the past three-and-a-half years. Same-store sales have declined for seven consecutive months. And full-year sales are expected to be down.
But the company is so universally panned that it might just be worth keeping an eye on as an under-the-radar turnaround play. I’ll continue to monitor this company and let you know if I see anything substantial.
That’s all for now. I will be on vacation for the next two weeks. While I hope to get plenty of rest and relaxation (who am I kidding? I have two kids, aged six and three), I’ll be visiting an area of the world that is chock full of great growth companies: Israel. I plan on coming home with a bucket full of new ideas to share with you.
I wish you and your family a wonderful Thanksgiving. I’ll speak to you again in December.
Marc Lichtenfeld
|
Today’s Smart Profits Action Center
- While many companies struggled to attract consumers during a third-quarter that saw the subprime mortgage sector collapse, extending the wider real estate downturn, as well as rising oil prices, Wal-Mart (NYSE: WMT) had no problem. The world’s largest retailer heads into the holiday season with strong momentum, following an 8% rise in third-quarter profits to $2.86 billion ($0.70 per share) on mammoth revenues of $91.95 billion. Not only that, it raised its full-year profit guidance. The recipe for the company’s success? Tight control over inventory, expenses and prices - and in particular, a return to its core strategy of low price leadership after an unsuccessful attempt to market to higher-income consumers in the apparel and home furnishings areas.
- And the holiday blitz has already started. The company has launched discounts on selected items, advertising them as similar to what shoppers will find on “Black Friday” (the day after Thanksgiving).
- In response to yesterday’s solid earnings announcement, investors sent Wal-Mart shares up $2.65 (6.1%) to close at $45.97. Recently, Xcelerated Profits Report editor Lee Lowell showed readers how to buy the retail giant at the price they wanted, rather than plowing in “at the market” and paying more than necessary. Not only that, they got paid for doing so. The secret lies in a simple, professional investment strategy. Find out how to “accelerate” your profits here.
Related Articles:
- Contrarian Investing: The Best Investment Strategy You Should Use Today
- Investing In The Stock Market: You Work Hard For Your Money, Now Make Sure It Works Hard For You
- Market Entry Strategy: Three Ways To Grab A Better Entry Price Than “At The Market”
