Who woulda guessed?

Here's a news flash, kids - trends continue to play out as expected. It’s all about consumables and discounting. Mall traffic and sales are weak, which shows clearly in comps for mall-based concepts. The consumer appears to be consolidating shopping trips to places like Wal-Mart and Costco that allow them to buy basics as well as discretionary items. Television sales are down in even the warehouse clubs, but up at Wal-Mart as the commoditization of flat screens continues. No retailers that I surveyed guided down.

Wal-Mart’s numbers were more than double expectations, coming in at 3.9% for the total company (1.4% expected). Of particular note: US Stores were up 4% (guidance was 0-2% and consensus was 1.4%). They mentioned specifically that they are seeing a bump from the stimulus checks. In a different press meeting this morning the number $350 million thus far was bandied about. Given that the average SuperCenter does $1 million per day (old fact, but probably still pretty correct), that might be a bit significant. Both traffic and ticket were up.

Target was within guidance but is lagging Wal-Mart and others who sell more food. TGT’s consumables exposure is about 20% of sales, and over 40% of sales (last year anyway) were in the weak apparel and home categories.

Nordstrom’s 10.9% comp was within the expected range of 8-12%. June expected to be VERY weak as the Half Yearly sale for Women & Children was moved from June to May. The two months combined should be fine.

Saks, a favorite on the upper end of the scale until now, fell out of bed. Seems like there might have been a few too many friends and family discounts given lately.

As for the rest of the mall? Nothing to write home about except Aeropostale (wow!), Zumiez and Hot Topic. Almost everyone else did worse than expected, in some cases (Gap) by unexplainably high percentage points. It's bad out there folks, but could you at least TRY, please?

not so Great Expectations

Tomorrow morning at a time that is so early it doesn't belong on any civilized person's clock the monthly onslaught of information known in retail land as comps (comparable store sales) will be released for our viewing pleasure.

These numbers can be both a huge help and a pain in the tush when analyzing retailers. The numbers themselves don't matter to the stock prices as much as how they differ from analyst expectations. Numbers may be not just negative but very negative, but as long as they're better than expectations, everything's hunky dory. And conversely, positive is good, but if they don't beat expectations, all bets are off

One of tricks is sorting the wheat from the chaff in the releases. Is a company blaming weather for poor performance? (They almost never give the weather credit for good sales.) Is anyone else blaming the weather too? Where are their stores concentrated? How's the economy (or the weather) in that area of the country? Are they up against easy comparisons from last year, or will last year be hard to beat? In March and April, you also have to take into consideration when Easter was last year... a change from month to month can also affect sales significantly.

Oh, and don't forget to look for clues about earnings. Sometimes the company will come right out and adjust earnings expectations up or down. Sometimes they'll just hint that margins are weak or strong, which may affect the quarter's earnings, even if they don't say so outright.

Getting back to tomorrow's numbers: expectations aren't very high. It should be happy days for the usual suspects selling food (see my post two days ago) such as Costco and Wal-Mart. The department stores aren't expected to do much at all... negative numbers should abound, although Nordstrom moved a big sale from June into May, so their comps should be good. In specialty and apparel stores, don't expect much there either. It's tough days at the mall.

Oh! Sparkly!

If you're not quite ready to write Jane Consumer's obituary, there are a number of retail stocks that are starting to look interesting right now. Valuations are discounting the worst case scenario for a lot of companies. Either Wall Street's earnings and growth projections aren't reflecting reality (and you have to give that some credence as a possibility... sometimes I think they live in Lake Woebegon where all their children are above average), or some of these stock prices are too low.

I'm not about to argue for a quick return to the consumer spending patterns of 2006 because, well, reality sucks. But let's think about companies that despite Wall Street's pessimism have managed to give us some positive earnings surprises (remember those?).

Come up with any yet?

I can wait.

Think international. Not international companies, they are really difficult for the average U.S. investor to buy unless they also trade here, but U.S. companies with large components of sales coming from overseas... preferrably from some of those red hot emerging markets.

Give up?

What about Tiffany (TIF)?

Consider the following:

• Earnings are beating consensus and going up: Last Friday Tiffany reported Q1 earnings of $0.50 - a full $0.10 above Street consensus. They took guidance for the full year up too.
• Their sales growth is all about international: over 60% of their stores are outside of the U.S. Even within the U.S., the New York Flagship had comp store sales up 16% when the rest of the stores in the country were down 4%. They attribute those strong sales to tourists. While Japan is still weak, other Asian countries were up 22%. Europe was up 30% not including the positive effects of foreign exchange.
• Strong management: management increased gross margin, bought back shares, and seems to have a good grasp of what the company needs. Activist shareholders might have helped prod on some of these things, but that's okay.

TIF is trading at 16.8x next year's earnings, which doesn't appear at first blush to be much of a bargain, especially with growth pegged at about 12% going forward. But when you consider that 16.8x is about 82% of the 5 year median forward P/E, that their Return on Capital has been steadily increasing, and the extent of their overseas sales including great locations (with more to come) in emerging markets... what's not to love?

Enough already!

Is there no end to the pain and insanity in retail land? It's just WRONG when the economy is so bad that even a can't-lose retail concept like Lululemon has to take down earnings guidance. Seriously, what could possibly be more mission critical to Jane Consumer than spendy yoga togs? It's a trend that is a bit concerning. It was just last week that another high-end Wall Street darling, J Crew, also had to bring down guidance.

I have sick sense of humor sometimes, but I find it tremendously amusing that if the company is growing its store base and appeals to an upper income demographic, Wall Street loves it. As if $4 a gallon gas will never affect people who make over $100k a year. Let's be real folks - the only way this economy isn't putting the squeeze on you is if you don't eat or use energy. And those folks above the US median income level (which is roughly $47k/year), in many cases those are the folks that stretched themselves even further beyond their means and are hurting more now.

So how on earth does someone invest in retail stocks right now, given all that? First, one takes a heavy dose of one's favorite antacid. Then, the next step is to determine your personal outlook on the economy. (You might want to take another swig from that Maalox bottle right about now.)

If your economic glass is half empty, think about where people either shop to save money or have to shop to survive. I'm a personal believer (and holder) of companies that sell food and other consumables such as Wal-Mart and Costco. I'm hard pressed to find a stock that I like more than Wal-Mart. Really. Wal-Mart. They've finally shifted the majority of their marketing away from that hideous bouncing smiley face and it's unhealthy obsession with dropping prices. Don't get me wrong, consumers absolutely need low prices right now. But they're not so desperate for low prices that they would endure the seven levels of hell that a shopping trip to Wal-Mart used to involve. Thank goodness management finally brought some fresh blood into their little closed world of NW Arkansas, and exciting new ideas such as 'even people on a budget like to shop in a nice environment,' and 'if people aren't in a rush to leave the store, maybe they will spend more money on discretionary items' started invading the corporate consciousness. Revolutionary, no?

Retail today is more than the old adage 'stack it high and watch it fly.' Retail is both art and science. For years, Wal-Mart excelled at the science of retailing - selling stuff cheap and controlling costs. Watch the CNBC documentary "The Age of Wal-Mart" sometime. The fact that they even know that strawberry PopTarts sell best before a hurricane scares me. Even scarier: that it took them so long to understand that a clean bathroom and short checkout lines make for happy consumers. And who would have ever guessed that putting up little signs that show us what an outfit should look like would sell more clothing? Oh yeah, the competition.

Which brings me back to how Wal-Mart has changed. As one Wall Street wonk put it recently, "this isn't your father's Wal-Mart." They have made strides on employee health care and the environment, both of which were causing issues with and for investors. They finally recognized that growth for growth's sake wasn't working. US retail domination via copious store count growth is no longer a stated goal (although World Retail Domination still seems to be on the table.) Thinking about Return on Investment is back in vogue at headquarters. And the arrogance that management once displayed toward their critics seems to have been at least muted if not dissipated entirely. Thank you Leslie Dach and Eduardo Castro-Wright: whatever they're paying you isn't nearly enough.

So there are all the touchy-feely reasons for owning the stock. The bottom line for a capitalist is buying the stock low and selling higher. Wal-Mart is currently trading at 16.7 times January 2009 consensus earnings of $3.45. Personally, my model puts earnings at $3.51, or a P/E of 16.3x '09 estimates. I am looking for P/E multiple expansion (investors willing to pay higher prices for a similar level of earnings) as it becomes more and more obvious that Jane Consumer isn't going back to her lavish lifestyle any time soon. Last year's aspirational consumer is now aspiring to put food on their table and gas in their tanks! I'm guessing that at least a 18.5x next year's earnings is reasonable, or about $65. If they continue to deliver strong sales and earnings, that number may experience inflation too.

Next time: where to look for investments if your economic glass is half full.

Let's Go Shopping!

For many years now, my job has been finding good investments in consumer stocks. Finding good investments in the consumer-related stocks has always been difficult, but today it feels hopeless. You might not have noticed, but if you are a consumer this economy probably isn't your friend, and that is translating into pain beyond measure in many of the retail stocks.

Retail is in my blood: my dad worked in retail from before I was born, and a Saturday of quality time with dad used to translate to walking stores with a clipboard evaluating everything from merchandising to cleanliness to customer service. Grandma was in retail too, and I blame her for my well developed sense of wardrobe entitlement (i.e. big and full closet). My husband will attest that I spend copious amounts of time at the mall, and I'm on a first name basis with way too many sales clerks.

Beyond that, I've made my living in the investment world for over 20 years. I've worked on strategies that were focused on growth, value, growth-at-a-reasonable-price, quantitative analysis, large cap, small cap, mid cap, domestic securities, and international investments. Been there, done that, got the t-shirt in six colors and three sizes.

I look forward to opening up a dialogue with anyone that might want to discuss what I'll be putting out as fodder.