Lombardi: Stock Market Commentary & Forecasts, Financial & Economic Analysis Since 1986

Posts Tagged ‘retail sector’

This Luxury Retailer Now Affordable?

By for Profit Confidential

Should You Take This Opportunity to Buy This Luxury StockThe top one percent are spending and don’t really care about the other 99%. For the retail sector and particularly the luxury-brand stocks, this is welcome news.

High-end jeweler Tiffany & Co. (NYSE/TIF) pleased investors and Wall Street on Wednesday after reporting better-than-expected results and increasing its fiscal 2015 earnings estimate for the second time. Consumers in the Americas, Asia, and Europe are spending in the retail sector.

While Tiffany is now near the top of its 52-week range and near a fair valuation, there are a couple of other luxury-brand stocks that may be worth a look.

In the luxury apparel and accessories area, Coach, Inc. (NYSE/COH), a former darling of Wall Street, is struggling just above its 52-week low. While there could be a speculative contrarian buying opportunity with Coach, the anemic revenue outlook would make me think twice. Fiscal 2015 revenues are estimated to contract 11.4% and rebound a mere 3.3% in fiscal 2016. These are not good metrics; unless you want a speculative trade, I would be looking elsewhere in the retail sector.

For a much better luxury apparel buying opportunity in the retail sector, you could take a look at a stock like Michael Kors Holdings Limited (NYSE/KORS), which is my favorite in this area. The stock is currently struggling and down 18% from its 52-week high of $101.04 on February 25, 2014, which suggests it could be a good buying opportunity

Concerns of slower growth rates have been hurting the stock, but the reality is that the growth continues to be excellent, especially for a company with a market cap of more than $16.0 … Read More

The New Land of Oz

By for Profit Confidential

When Gold Will Finally BottomYesterday was an amazing day for the markets.

Gold bullion hit a three-month low despite: 1) inflation rising rapidly in North America; and 2) the Chinese buying half of this year’s world gold production.

The stock market was up to a new high despite: 1) corporate insiders selling like mad; 2) corporate earnings growth collapsing; 3) the amount of money investors have borrowed to buy stocks standing at a record high; and 4) the economy stinking.

In the words of Robert Appel, my esteemed colleague, the following best describes what is happening with the markets:

“Time to take those ruby slippers out of the closet because we are definitely on our way to the ‘Wizard of Oz’ show once again. There is a view that the government and its ‘special contractor’ (the Fed) have things under control and we are now at the beginning of the biggest stock bull in history. We don’t buy that theory for a minute but we do acknowledge it exists.

“Those opposing this view—an ever-declining number—suggest that if inflation were defined as it was when the greatest economic minds of our age were still alive—the U.S. economy would be in big trouble. The recent corporate earnings wipeout in the retail sector was one of the most under-reported financial stories of the year.

“Interestingly (this is too bizarre to make up) the only major upside surprise in the retail sector in respect to first quarter earnings reports was Tiffany’s…where they can barely keep up with demand. No surprise for our readers as the ‘gap’ between rich and poor under QE [quantitative easing] has only intensified. QE … Read More

The Opportunity Coming to the Luxury Retail Stocks

By for Profit Confidential

The Pros and Cons I See in the Retail Sector Right NowWe all know how bad this winter has been so far. The harsh weather across the majority of the country has impacted jobs growth, commerce, housing, and consumer spending.

Of course, with the spring season on the horizon, we’ll soon see if the weak economic metrics mentioned were really an aberration due to the weather—or a sign of further slowing to come.

From what I can tell right now, we are definitely seeing some growth issues in the retail sector that have been attributed to the winter weather. The Home Depot, Inc. (NYSE/HD) reported a somewhat flat quarter, as did Lowes Companies, Inc. (NYSE/LOW). However, I understand why they’ve reported flat numbers—it’s winter; who wants to renovate or build when it’s so cold outside?

Bellwether Wal-Mart Stores, Inc. (NYSE/WMT) is also struggling to attract consumers to its doors. The global retailer delivered flat sales and earnings growth in its fiscal 2014; revenues grew a mere 1.6%, while earnings growth was not much better at an even two percent. Clearly, we are seeing some hesitancy in consumer spending and the retail sector.

The winter-related turmoil is not confined to just one area, though; it has impacted many retailers. However, the luxury side appears to be faring well, with excellent growth still at Michael Kors Holdings Limited (NYSE/KORS). This luxury retailer is providing staggering growth despite the sluggish retail sector. (Read “Stock Falling, but Rich Still Spending; My Top Luxury Stock Play.”) Clearly, the more affluent part of the masses continues to do very well, especially with the continued advance in the stock market, which has produced many new millionaires…. Read More

Why the Winter Storm Is Skewing More Than Jobs Growth

By for Profit Confidential

Winter Storm Skewing More Than Jobs GrowthOld Man Winter appears to be killing the retail sector and the economic renewal. Extreme cold and nasty weather has engulfed about 70% of the country, reaching as far south as Georgia, North Carolina, and Texas, which don’t traditionally experience winter weather.

All that nasty weather means less driving to the malls and shops, which, judging by the numbers, appears to have been the case over the last two months. And if consumers don’t spend, the retail sector hurts and this translates into softer gross domestic product (GDP) growth.

Retail sales contracted by 0.4% in January, which represented the second straight month of declines following a revised contraction of 0.1% in December, according to the U.S. Department of Commerce. The poor showings were attributed to the weather.

With consumers staying at home, we are hearing whispers that fourth-quarter GDP growth could be revised downward from its initial 3.2%.

And while it’s too early to call for the economy to weaken, continued bad weather could mean just that. Now there are, of course, other reasons for the lackluster retail sector metrics.

There’s still a sense that the jobs market continues to be fragile following the creation of a mere 74,000 jobs in December that was blamed on the weather. Yet January was only marginally better with the creation of 113,000 jobs, which was well below the 185,000 estimate.

The jobs numbers are horrible, and unless they start to improve, I expect consumers to continue to feel hesitant about spending in the retail sector.

As I wrote in a previous commentary, investing in the retail sector will be much more difficult this … Read More

Stock Falling, but Rich Still Spending; My Top Luxury Stock Play

By for Profit Confidential

Why This Luxury Retailer Is Simply the BestThe stock market is in turmoil and looking for help from buyers. While some are calling for investors to run to the exits, I look at weakness and market chaos as a buying opportunity.

It’s simply unrealistic to think that all stocks deserve to fall during a market adjustment like what we are seeing at this time. There are good companies out there that will stage a strong rally when the tide in the stock market turns.

In the retail sector, we saw a gasp of air from troubled J. C. Penney Company, Inc. (NYSE/JCP), as the former retail sector and Wall Street darling struggles to stay afloat. With about $2.0 billion or so of liquidity left, it’s going to be a race against the clock. J. C. Penney reported a 3.1% jump in comparable-store sales during the holiday shopping season, which is a good result for this turnaround play. (I’d rather stick with these two contrarian retail sector plays, though, which you can read about in “These Retail ‘Screw-ups’ Could Turn Things Around This Year.”)

My top luxury play in the retail sector, as many of you know, is Michael Kors Holdings Limited (NYSE/KORS).

In November 2013, I wrote, “The chart of Michael Kors shows the steady upward trend in the stock since the beginning of 2012. There is some congestion and resistance at this time…but we are seeing a bullish ascending triangle and a possible upside breakout on the horizon, based on my technical analysis.” The stock was up 20% Tuesday morning. (Read “My Favorite Pick Among the Luxury Brand Stocks.”)

It’s obvious why … Read More

Fourth-Quarter Earnings Season Another Dud

By for Profit Confidential

4Q Earnings Reveal More DudsYou can tell from the activity and the lack of direction in the stock market that the much-anticipated fourth-quarter earnings season has, yet again, been another letdown.

Now I’m not saying the early results this earnings season have been that bad; it’s just that the numbers from corporate America have not been that great.

And with just four days remaining in January, the NASDAQ and Russell 2000 are slightly positive, while the Dow Jones Industrial Average and the S&P 500 are in the red. This creates some anxiety.

As many of you know, I have discussed my views on earnings and, more particularly, the revenue side. I don’t really care that companies beat earnings-per-share (EPS) estimates as many of these so-called sell-side estimates from Wall Street have been adjusted downwards to meet the lower expectations over the past few years.

It’s akin to analysts doing whatever they can to make sure companies can meet lower targets instead of demanding that companies deliver.

So far, the early numbers this earnings season suggest it’s more of the same—and perhaps slightly worse.

Of the 53 S&P 500 companies that have reported so far this earnings season, a mere 57% have managed to beat the mean average based on research from FactSet. (Source: “Earnings Insight,” FactSet, January 17, 2014.) And of the 101 companies that have offered guidance, a staggering 96 companies offered negative EPS guidance, while just 15 companies were positive in their assessment.

Folks, this is not good, considering that Wall Street has already been manipulating estimates. Plus, only 58% of these companies have beaten the mean sales estimates. Again, not good…. Read More

The “Big Thing” for Companies This Year

By for Profit Confidential

Here Come the Job CutsLast year, the “big thing” with companies was buying back their shares to boost per-share corporate earnings. In 2013, share buybacks hit their pre-financial crisis high. If big public companies didn’t buy back so much of their own stock in 2013, per-share corporate earnings just wouldn’t be that great.

This year, I expect share buybacks to continue at the pace we saw in 2013. Another “big thing” companies will do this year will be labor force reductions (cost-cutting) to make corporate earnings look better in light of generally weaker sales.

Companies have already started to lay out their plans for employee cuts…

Intel Corporation (NASDAQ/INTC) said it will be reducing its workforce by 5,000 this year. Here’s what the company spokesman, Chris Kraeuter, had to say: “This is part of aligning our human resources to meet business needs.” (Source: Randewich, N., “Intel to reduce global workforce by five percent in 2014,” Reuters, January 17, 2014.) Intel had flat fourth-quarter 2013 corporate earnings.

Hewlett-Packard Company (NYSE/HPQ), another major company in the key stock indices, is taking a similar approach. In 2014, it is expected to cut its workforce. According to its long-term restructuring plan, 34,000 jobs, or 11% of the total workforce, will disappear.

And job cuts aren’t just happening at companies in the personal computer (PC) industry…

We see this phenomenon occurring across the board. Companies in the retail sector are struggling as well. Macy’s Inc (NYSE/M) said it will be reducing its labor force to lower costs. As part of the company’s cost-cutting program to boost corporate earnings, it will be eliminating about 2,500 jobs in 2014. (Source: … Read More

These Retail “Screw-ups” Could Turn Things Around This Year

By for Profit Confidential

Two Contrarian Plays for the Retail SectorThe retail sector can be a brutal place for retailers at all times. Think about it. You have to convince the consumer to buy your stuff instead of a rival brand’s. It’s all about the product, image, and marketing. That’s why shoppers look to brand-name items versus no-name products. Are the brand-name goods better? Perhaps, but is it enough to justify the price differential?

 Yoga pants maker lululemon athletica inc. (NASDAQ/LULU) is currently at a 52-week low driven, in part, on poor press and rising infringement in its core market. But with sales estimated to grow 16.1% in fiscal year (FY) 2014, followed by 16.3% growth to $1.85 billion in FY15, according to Thomson Financial, the numbers actually don’t look that bad. For the speculator, it may be an opportune buying opportunity to consider this retail sector stock.

lululemon athletica Nasdaq Chart

 Chart courtesy of www.StockCharts.com

 At this price level, the upside reward for Lululemon appears to be greater than the downside risk. The company just needs to deliver results and keep its founder, Chip Wilson, from saying anything stupid in public. In addition, the company needs to address its quality-control issues, especially as cheaper competitive goods surface in the retail sector. When you buy Lululemon, the superior image and quality should be what you are paying for; if the company can execute on this simple retailing strategy, we could see strong gains for Lululemon in the retail sector.

 And then there’s Coach, Inc. (NYSE/COH). My wife loves this place, especially its discount outlets that are scattered across America. The problem with Coach has been the competition, specifically the rise of Michael Kors Holdings … Read More

The Company I Like Among the “Out-of-Favor” Stocks

By for Profit Confidential

Top Stocks for Investing Against the HeardWhen it comes to love, we often hear the phrase, “Beauty is in the eye of the beholder.” Well, the same could be said for the stock market.

Many investors look for the companies that deliver consistent results and satisfy the number-crunchers on Wall Street. While I belong to that group, I also take alternative views and search for companies that are the so-called dogs of the stock market. However, as our theme suggests, choosing in the stock market based only on a company’s outer appearance doesn’t always produce the best outcome.

Think about it this way: Why always select the stocks that are in favor by the stock market? Often, you may be the last to the dance, so you end up chasing stocks that have already made major stock market moves—the upside is limited.

I like looking at distressed companies that are facing some hurdles but have enough upside potential to make these stocks a worthwhile trade in the stock market. These plays are often referred to as contrarian investments—companies that are out of favor but have enough potential to demand a closer look in the stock market. In this case, you are often buying a company at a low valuation and price, as the stock market has turned against them.

I like these contrarian situations, as the potential upside is significant if these companies can turn around their operations.

In the past, I have highlighted opportunities such as Groupon, Inc. (NASDAQ/GRPN) and Facebook, Inc. (NASDAQ/FB)—both of which made spectacular gains thereafter. (Read “Why Macy’s Is Such a ‘Good’ Retail Play.”)

Nokia Corporation (NYSE/NOK) was … Read More

Top Stocks for Investors in an Uncertain Retail Market

By for Profit Confidential

How to Profit from an Uncertain Retail MarketInvestors were happily greeted with a surprise on Tuesday after the reporting of better-than-expected retail sales numbers that suggest the consumer spending market may be alive and well after all.

In December, the headline retail sales reading jumped 0.2%, which was above the Briefing.com estimate calling for a flat result. Even after adjusting for the volatile auto sales, the core retail sales reading surged 0.7% compared to the 0.4% consensus estimate.

The results offer some encouragement for spending this year in the retail sector and were much needed, given the recent downward guidance from several retailers.

Now, don’t get too giddy and go out and buy retail stocks at random. It’s not that easy. Investing in retail stocks at this time requires careful thought and evaluation. But with the right investments, there’s some money to be made in the retail sector.

The National Retail Federation also reported some encouraging numbers for the retail sector. Excluding auto, gas station, and restaurant sales, retail sales advanced 3.8% in November and December.

Sounds good on the surface, but there may be some underlying issues surfacing in the retail sector. About 25 of the 29 retailers that issued earnings guidance, unfortunately, offered a negative outlook. (Source: O’Donnell, J., “Holiday sales paint mixed picture for retailers,” USA Today, January 14, 2014.)

The stats put forth are non-conducive to a rally in the retail sector and, in fact, represent a troubled retail climate that is facing lower income from middle-class consumers.

Even the discounted retail sector area is showing some weakness in growth. Family Dollar Stores, Inc. (NYSE/FDO) offered a soft tone in its outlook … Read More

Why Macy’s Is Such a “Good” Retail Play

By for Profit Confidential

stocks and the larger retail sectorIn the retail sector, it’s all about vision and execution. The reality is it’s all in the details, especially in the department store sector, where it’s all about product offerings and marketing.

Of the department stores in the retail sector, Macy’s, Inc. (NYSE/M) is probably the best-managed and best-performing company. Simply take a look at rival J. C. Penney Company, Inc. (NYSE/JCP), and you’ll understand why it has been a lot better for Macy’s investors than J. C. Penney’s. (Read more of my thoughts on this in “J. C. Penney, Coach Joining the Losers in the Retail Sector?”)

While Macy’s continues to look for ways to continue its sales growth and profitability, J. C. Penney is just trying to stay afloat in the retail sector and avoid a possible bankruptcy down the road.

The chart below shows the divergence in share price between Macy’s and J. C. Penney since October 2012. Macy’s has steadily climbed, as reflected by the red candlesticks, compared to J. C. Penney, as shown by the dark green line, based on my technical analysis.

Macy's Inc. NYSE Chart

Chart courtesy of www.StockCharts.com

It’s amazing how the wrong strategy could backfire in the retail sector and cost a company like J. C. Penney billions of dollars, while rewarding a company like Macy’s for excellent execution.

Macy’s announced it would cut about 2,500 workers, which is a small fraction of its total headcount of about 175,000. The company will also look at other cost cuts that could shave about $100 million off the expense side beginning this year. (Source: “Macy’s, Inc. Outlines Cost Reduction Initiatives to Support Continued Profitable … Read More

What I Learned About Retail Stocks While Shopping in South Florida

By for Profit Confidential

Top Retail Stocks to Watch in the New YearI’m not a shopper by any means but I just got back from my annual trip to South Florida where I was able to take a look at the retailers that appear to be attracting tons of traffic in the retail sector.

First of all, the big-time shopping mall in the Orlando area is the “Premium Outlets” mall chain. The operator of these discount outlet malls across America (which recently expanded into Canada), Simon Property Group, Inc. (NYSE/SPG), is a very interesting play on the retail sector. In each mall, there are often many more than 100 retailers from the top brand-name retail stocks in America.

As I walked around the mall, I noted what retailers were popular based on each store’s traffic and the buying frenzy inside. Remember, consumer spending drives the economy and overall gross domestic product (GDP) growth, so business in the retail sector can be quite telling.

One of the top retailers was NIKE, Inc. (NYSE/NKE), which is a major attraction in the mall and one of the top stocks in the retail sector. While Under Armour, Inc. (NYSE/UA) has been increasing its market share, I continue to feel that NIKE is the “Best of Breed” in the sports apparel business in the retail sector.

In the youth apparel area, The Gap, Inc. (NYSE/GPS) was a major focal point in the mall, along with Banana Republic, which The Gap also operates. In the youth and early adult clothing market, The Gap has been successful in turning around its business over the past decade and is now a good pick to consider in the retail sector…. Read More

The Stock That Will Perform the Best as Consumer Spending Pulls Back

By for Profit Confidential

Stock That Will Perform the BestThe objective of Black Friday shopping for consumers this year was simple: find the best discounts in the retail sector. And while discounts seem to be everywhere, consumers are more focused on saving a dollar. There will surely be some sad retailers in the retail sector this holiday shopping season.

The retail sector will likely face some hard times that could get worse as we move through the final two weeks of the key shopping season prior to Christmas.

While the likes of Wal-Mart Stores, Inc. (NYSE/WMT), Target Corporation (NYSE/TGT), and Kohls Corporation (NYSE/KSS) struggled to attract shoppers, discounter Dollar General Corporation (NYSE/DG) reported a strong fiscal third quarter that supports why I favor the discounters in the retail sector. (Read “What the Changing of the Guard at Wal-Mart Means for the Stock.”)

Discount retailers like Dollar General will likely continue to perform well and attract customers, since the economy continues to appear fragile, especially in the jobs market. And even as the economic renewal picks up, I still sense the discount retail sector will continue to fare well.

In the case of Dollar General, the fiscal third quarter (ended November 1, 2013) showed net sales jumping 10.3% year-over-year to $4.38 billion, up from $3.96 billion in the year-earlier fiscal third quarter. The key same-store sales metric jumped 4.4% year-over-year.

The company reported adjusted earnings of $231 million, or $0.72 per diluted share, in the third quarter, up 10% from $210 million, or $0.63 per diluted share, in the comparative quarter.

And while Dollar General is up 21.4% over the past 52 weeks as of December 5, … Read More

Why Stocks Likely to Head Higher into the New Year

By for Profit Confidential

retail sectorToday is Cyber Monday, when consumers will flock online and spend over a billion dollars. In 2012, $1.47 billion in sales occurred on this day and the expectations are that the number could swell to $1.68 billion today. (Dengler, P., “Cyber Monday Predictions For 2013,” Business2Community.com, October 28, 2013.) We will also find out today how Black Friday and the key weekend shopping period were for the retail sector. A big surprise and the stock market will reach higher.

The stock market has shown little signs of wanting to slow and is continuing to show bullish investor sentiment and the ability to move higher this month and into 2014.

The S&P 500 is at 1,800 and the DOW Industrial at 16,000. The positive momentum is in place for additional gains. The S&P 500 moving to 2,000 next year, up 11.11%, is realistic depending on what the Federal Reserve does and how the economy behaves. The Dow 20,000 may have to wait a few years. Of course, this is contingent on the five-year bull market holding.

On the charts, technology and small-caps continue to lead the broader stock market higher. The NASDAQ closed above 4,000 for the first time since September 2000, when the index was on the decline after trading at a record 5,132 in March. The buying in technology and growth is not a surprise, as buyers have chased risk and potential this year. The top sectors offering the most sizzle at this time are Internet services, mobile, and social media.

COMPQ Nasdaq Composite Chart

Chart courtesy of www.StockCharts.com

Small-cap stocks continue to lead the pack this year as the economy recovers, albeit … Read More

What the Changing of the Guard at Wal-Mart Means for the Stock

By for Profit Confidential

Wal-MartWal-Mart Stores, Inc. (NYSE/WMT) is signaling its intent on conquering the global low-cost (discount) retail market following the announcement that Doug McMillon will become the new CEO and president of the world’s biggest and most influential retailer, boasting nearly $500 billion dollars in annual sales and employing over two million people worldwide.

The change at this time makes sense as Wal-Mart tries to expand its operations globally, especially in China. McMillon was a fitting candidate, as he had been CEO of Wal-Mart International and understands what it takes to grow a company internationally.

Wal-Mart operates around 11,096 stores in 27 countries worldwide. Sales in the United States account for the vast majority of its total sales stream, but international sales, at $33.1 billion in the fiscal third quarter, accounted for nearly 25% of total sales. This means that there are opportunities here.

While Wal-Mart is the “Best of Breed” and a buying opportunity in the discount retail sector, the company’s real underlying potential growth lies in its ability to expand its international sales, which is where McMillon comes in.

Wal-Mart Stores Chart

Chart courtesy of www.StockCharts.com

In the fiscal third quarter, operating income rose 5.8% in the U.S., but saw eight-percent growth in its international stores on a constant currency basis. The profitability of its international stores indicates why the expansion in places such as China, Brazil, India, and other emerging markets is so critical.

Wal-Mart initially ventured into China in 1996 and is currently operating Supercenters, Sam’s Clubs, and Neighborhood Markets. The retail footprint comprises about 401 units in China, with 356 under the Wal-Mart Supercenter operation. Stores are situated in … Read More

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