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Beware Retail Zombie H2 Syndrome

First-quarter retail earnings have kicked off and investors seem to be willing to look way beyond the weather and Easter Bunny issues and hoping for a better second half of the year. I call this the “Retail Zombie Second-Half Syndrome.”

We have heard these stories year after year, particularly in the never-ending bloated inventory teen space. The great news for retailers this year is the weather blame game in the first quarter (which was legit in many cases) is giving investors yet another reason to believe.

Original publish date May 14, 2014

The problem is that all retailers are not created equal in the Second-Half Zombie Syndrome Game; however, there are a few retailers that are worth the second-half investment story. Look no further than the Macy’s (M) report this morning. While sales were about 3% below expectations and comps decreased 1.6%, year-over-year margins increased.

Yes, let me repeat: There is a retailer that has so much influence over vendors it has the ability to maintain/increase profit margins even when the weather and the Easter Bunny are working against us. Despite a first-quarter sales miss, Macy’s suggested that April improved and confidence that the first quarter was just a blip resulted in reaffirmed guidance of 2.5%-3% comps for the year. And then management threw in a 25% increase in the dividend and an increase in buyback plans.

Of course, Macy’s is not invincible. The retailer ended the quarter with inventories up 4.7%, year-over-year. With comp plans of 2.5%-3%, we could certainly find fault with that less-than-perfect spread. However, based on Macy’s track record of using its muscle to manage its margins, this second-half story is as good as it gets.

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Target CEO Leaves the Building

Originally published May 5th 2014

Target (TGT) announced its CEO will head for the exit after 35 years with the company.

The reality is someone’s head had to roll for the company’s less-than-stellar handling of a data breach during the all-important holiday season. But the delayed and poor response to the customer data breach was just the icing on the cake when it comes to Target’s problems.

Let’s start with Target’s Canada fumble. Rewind to when Target announced it would head north in search of growth. Optimistic expectations for a new avenue of growth actually had investors looking beyond less-than-inspiring traffic trends in the U.S. Just one year after the Canada launch, we are now looking at dilution that is greater than 2x original estimates.

To make matters more confusing, the company will no longer break out dilution from the Canadian venture. Make no mistake, this fumble was an execution issue as Target misread the all-important consumables business.

Where does Target go from here? While guidance for 2014 was disappointing, you still may want to question whether or not the company has cleared the expectations deck. Don’t forget Target falls in to the back-half weighted story camp. In this case, investors may not be willing to wait that long.

For Target, this year’s headlines may continue to be tough traffic, rising costs, margin pressure and a big Canada question mark.

That is a combination that can’t be hidden by the weather blame game.

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ANF/TGT: Guidance Reality Check

published feb 26

Today, Target (TGT) and Abercrombie & Fitch (ANF) reported earnings that fell into the “could have been worse” category. That was enough to send both stocks rallying in the high-single digits on a percentage basis. While both retailers issued guidance that was in the ballpark of the Street’s expectations, should we believe the guidance? History has told us no. Let’s cut through the numbers.

Target’s ability to guide earnings on the mark in 2013 was less than stellar. The worst offence was projecting the dilution from the venture into Canada. The dilution from going across the border was 3x original expectations. That is credibility issue No. 1. And in terms of the U.S. business, while we can’t blame Target for the environment or the snow, we can blame the company for several quarters of setting the bar too high. Throw in a credit card hacking scandal that was brought to light at a snail’s pace and I am not really sure why I should have confidence in the 2014 EPS range of $3.86-$4.15.

I should also mention that range is back half weighted — who doesn’t love a put off the earnings until the second half of the year story? I should also mention Target admittedly cannot tell us what the impact of the credit card hacking will yield in 2014. Last, while margins of -40 basis points could have been worse, have you seen the year-over-year inventory growth up double digits? That may spell gross margin pressure in the current quarter.

Let’s move on to the house of hoodies — Abercrombie & Fitch. Similar to Target, Abercrombie slashed earnings expectations then “beat” the low bar. Yes, Abercrombie & Fitch has pulled this trick out before and hey, it works – in the short term, that it is. I am not ready to give a round of applause for beating the bottom line yet missing sales. Cost-cutting stories usually work short term but history tells us sales rule at the end of the day. U.S. comps deteriorated through the quarter (U.S. holiday comps decreased 4% yet the quarter ended -8%). The glimmer of good news was that the international segment improved — but, as a gal who spends way too much time in Europe, I can attest that never-seen before promotions at certain flagship stores appeared before holiday to get things moving. Yet the company is looking for flat-to-slightly-down gross margins for 2014. Really?

I do have to give credit to where credit is due to Abercrombie & Fitch. Suddenly, the company has become warm and fuzzy on corporate governance. The CEO/Chairman role has been separated after outrage that Michael Jeffries will continue to rule to the roost. Independent board members have appeared and a poison pill has been killed. On the operational side, the company is continuing to evaluate real estate and acknowledges it has to differentiate between brands. Collaborations are in the works and the company is embracing the fact that fast fashion is not going anywhere.

Best of luck to both companies in meeting/beating current guidance. However, I wouldn’t rule out a déjà vu of 2013.

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CVS:No More Smoke With Your Coke

original publish date Feb 6 2014

CVS Caremark (CVS) is taking the generally accepted moral high ground and saying, “No more smoke with your Coke (KO).” The drugstore chain is pulling all tobacco products from their stores, effective Oct. 1 of this year.

At first glance, the move makes total sense. CVS is on the road to expanding health services, such as providing basic-care clinics and in-store consultations on such things as — yes — how to stop smoking. Among other things CVS also, for instance, encourages you to fill those close-to-expiring prescriptions. So it is clearly inconsistent for the store to also offer you a cancer stick in the check-out line.

Does this mean the pack (pun intended) will follow? The media, the president and the Twittersphere have all applauded CVS for doing the right thing. However, Wal-Mart (WMT),Rite Aid (RAD) and Walgreen (WAG) might all be too focused on the bottom line to just say, “no.” While cigarettes are low-margin and a pain to sell, given regulations concerning age and so on, they do drive traffic.

In fact, CVS is estimating $1.5 billion in lost revenue from tobacco itself and an additional loss of $500,000 for add-ons that come with those sales. Let’s hope the company is underestimating the lost-add-on results. While there may be a short-term goodwill effect among nonsmokers, the consumer has tended to have a short-term memory — and, otherwise, convenience rules all.

Meanwhile, Family Dollar (FDO) and Dollar General (DG) are more than happy to take your Marlboro money. They are also hoping you will throw some Doritos, instant mac and cheese and breath mints into your basket along the way.

If you really think eliminating cigarettes won’t matter, consider the following revelation from Dollar General’s most recent earnings call (for the quarter ended October). CEO Richard Dreiling said that, during the quarter, 44% of cigarette buyers also purchased a substantial number of other products — up from just one-third of cigarette buyers when the store began selling tobacco. “We’re beginning to convert the cigarette customer into a shopper,” he said.

That is called a convenience-market-share win. In this case, what many perceive as the moral low ground may produce the highest returns.

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Macy’s: Slow and Steady Wins the Race

published Jan 9 2014

Macy’s (M) just reconfirmed the best way to play low expectations is stick with the best of breed.

I have long been a proponent of the average investor staying away from “turnaround” stories like J.C. Penney (JCP) in favor of slow-and-steady-wins-the-race stories like Macy’s. This was illustrated on Wednesday when JCP issued a pointless press release saying the company is pleased with performance for the holiday period. Considering the company was happy to reveal an actual number for November (10%), this action just left investors wondering how bad it was.

This is the kind of press release that should have been shredded well before their Investor Relations department even considered hitting the send button. It is actions such as this and other missteps (remember the “We don’t need to raise cash, oh sorry, we are raising cash”scandal?) that will continue to send the stock spinning like the Mad Hatter’s tea cups. No thanks.

Let’s go back to Macy’s. I have been sounding like a broken record on CNBC’s Power Lunch for a while now, talking about Macy’s as the retailer to own. Omnichannel is not just a buzz word. Macy’s had a leading start in fulfilling orders from stores, not to mention investing in brands, employees and localized product. I will continue to sound like a broken record with the stock at 12x 2014 guidance numbers.

Macy’s reported on Monday a 3.6% “sigh of relief comp” when the Street was braced for the worst. More importantly, the company maintained its annual earnings-per-share forecast. The retailer did not have to give the farm away to make those comps. I wish I could say the same for the rest of the department store space.

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