There’s Value In The Retail Market Yet… If You Just Know Where To Look
Tuesday, December 2, 2008: Issue #579
by Martin Denholm, Managing Editor, The Smart Profits Report
The U.S. retail market is suffering, and has been for months now. Now that Christmas is drawing steadily nearer, consumers are back on the shopping war path… but only if they can do so with significant discounts.
Knowing the mindset consumers have this holiday season, it was no surprise to see last Friday’s newscasts feature the rather desperate, “running of the bulls” scenes, as herds of bargain-hungry consumers bulldozed into stores in search of hot deals.
And boy, the U.S. economy could certainly use any sales stimulation the retail market can bring.
In contrast to consumers’ zest, the economy isn’t bulldozing anything… it’s staggering through a recession instead - one that started a year ago, according to the National Bureau of Economic Research.
The group says employment and income peaked in December 2007, with sales topping out in June. It said the deteriorating job market is a key cause of the recession, as the U.S. shed 1.2 million jobs through the first 10 months of 2008 - with 325,000 more layoffs projected for November.
In our last months issue, we suggested ways to profit from the retail sector bloodbath by compiling a stock watchlist which you can find here. So what does this news mean for the already beleaguered retail sector this season - and are there any firms that could prosper? Here are a couple to consider…
The Retail Market Wants You To Do Your Patriotic Duty: Spend
‘Tis the season to… well, spend, and the U.S. retail market is ready and willing to help you out with your shopping needs. Of course on Black Friday ‘08, consumers didn’t seem to need much of a push to do just that.
In a credit-oriented nation, Americans again proved that they spend better than the rest. The National Retail Federation (NRF) says 172 million consumers hit the malls or logged on to buy goods over the extended Thanksgiving weekend - a 17% jump from the same period in 2007. And ShopperTrak says “Black Friday” sales rose 3% to $10.6 billion over “B.F. 2007,” with the average consumer spending $372 - up 7.2% from a year ago.
Granted, a 3% sales rise isn’t spectacular, but it’s not terrible for a nation with a pathetic savings rate, a 3.7% year-over-year inflation rate in October, and 1.2 million job losses. I’m sure America’s battered banks are wondering exactly where these guys are getting their money from - and whether they can pay it back.
Retailers are doing their best to help - and potentially at their own expense…
The Retail Market’s Vicious Cycle
Many still predict a rough time for retailers, with the NRF predicting a measly 2.2% rise in holiday shopping sales - the lowest since 2002. Retailers are compelled to offer eye-popping deals to cash-strapped consumers, but they can’t sustain the bargains forever, for risk of eroding their profit margins too much.
That could result in flat sales and profit growth, with some analysts suggesting that it could also lead to more bankruptcies, following previously discussed electronics giant Circuit City, Linens n’ Things, and The Sharper Image. In turn, that could drive unemployment even higher.
Already, a major online trend is providing some clues…
Consumers Are Willing If The Retail Market Offers The Right Incentives
There was plenty of speculation on how the retail market would perform during Cyber Monday, so here’s the long and short of the actual results…
The good news: Online traffic on “Cyber Monday” (the Monday following Thanksgiving, which traditionally kicks off the online shopping season) climbed by 10% over the same day in 2007, according to Pricegrabber.com. Other firms have also reported heavy activity, with Target (NYSE: TGT) expecting its web traffic to jump 40% this season.
The bad news: Online research firm comScore says web sales are down 4% so far this season and will remain the same as last year throughout the November-December compared at $29.2 billion. That’s prime evidence that deep discounts could squash profit margins. But essentially, retailers have little choice which creates a profit opportunity from the retail sector bloodbath this holiday.
But what choices do investors have?
The Retail Market Agrees, “It’s Wal-Mart Time”
A few weeks ago, my colleague Marc Lichtenfeld gave you three companies that could be set to buck the gloomy retail market trend this season.
One of them was sector bellwether Wal-Mart (NYSE: WMT), whose CEO Lee Scott proudly proclaims, “It’s Wal-Mart time. This is the kind of environment that Sam Walton built this company for.”
He’s right. As consumers go all-out to dig up value, Wal-Mart is among those discount-oriented firms set up to not only weather this season’s storm, but to profit from it. Check out Marc’s article for more details, plus his thoughts on Kohl’s (KSS) and Dollar Tree (Nasdaq: DLTR).
I’m going to throw another one into the mix - The TJX Companies (NYSE: TJX) - a company I actually highlighted here a year ago…
TJX Is Easily Set To Beat The Rest Of The Retail Market
As Walton acknowledged, when the economy gets hit, consumers turn to alternate sources in the retail market. But Wal-Mart isn’t the only place out there to shop, and TJX has already proven its worth before.
At the time, the stock traded around $28.50 and bounced to $32 by early February 2008, followed by a 52-week high of $37.52 in August.
Since then, however, shares have sunk back to the $20 area, as a combination of high oil prices at the time stifled consumer spending, while the U.S. dollar (the company also operates overseas, including Britain and Ireland), economy and stock market slumped.
Despite this, though, the firm reported a 4% and 3% sales rise in August and September respectively, compared with August-September 2007. That’s a testament to its business model - the company offers fashionable, quality goods (some of which it buys from other higher-end retailers’ excess inventory) at attractive prices.
However, total third quarter profit came in at $235.8 million ($0.54 per share), compared with $249.5 million ($0.54 per share) in Q3 2007 - a 5.5% drop, due to the negative economic climate and an exchange rate hit. Over the first nine months of 2008, though, TJX earned $629.9 million ($1.42 per share) over the $470.6 million ($1.00 per share) from January-September 2007.
TJX pegs fourth quarter EPS between $0.58 and $0.62 - lower than the $0.67 in Q4 2007 and the $0.72 estimates, but $2.07 to $2.11 per share in fiscal 2009, compared with $1.68 for this year.
Also, the company’s T.J. Maxx and Marshall’s stores could be prominent destinations for bargain-hunting shoppers this season. The fact that The Gap (NYSE: GPS) posted better than expected third quarter results could bode well for TJX. Other positive factors include the U.S. dollar strengthening a little and Card Activation Technologies settling its litigation against TJX.
Ultimately, fourth-quarter retail earnings will tell the full story of this holiday period
And while the overall gloom shrouding the retail sector could drag successful, bargain-oriented companies down with the pack in the short-term, provided their business models lure in discount-hungry consumers this season, they could end up having the final word.
Best regards,
Martin Denholm
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Today’s Smart Profits Notes
~ With the U.S. economy having been in recession for a year, according to the NBER, it’s already one of the longest downturns since the Great Depression era in the 1930s. Only two of the previous 10 post-Depression recessions lasted as long as a year.
~ Staples (Nasdaq: SPLS), the world’s largest office supply store, just released its third quarter report, which shows mixed results. While its net income fell to $156.7 million down from $274.5 million in Q3 2007, the company still beat profit expectations. It came as revenue fell by as much as 8% in North American stores, but Staples is staying in the game by reducing capital spending and taking on Dutch distributor Corporate Express NV, which it hopes will eventually counter lower sales in the U.S. and Canada.
Related Articles:
With “Black Friday” Just Hours Away, Here Are Some Retailers You Can Put In Your Portfolio
Circuit City Blows A Fuse… But Here’s Why Its Bankruptcy Doesn’t Spell Holiday Doom For Retailers
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