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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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Best Buy’s Get Out of Jail Free Card

Retailer hhgregg (HGG) reported a painful same-stores sales decline of 11.2% for the holiday quarter — double the expected drop. Appliances were the bright spot, as comps rose 1.5% in that category. Home products comprise a new product category, so this segment registered a 36% same-store-sales climb. (If you put enough new stuff in the store, you can actually bump up your comps in the short term.)

Comps for consumer electronics, on the other hand, declined 20%, and computing and wireless plummeted 25%. This isn’t exactly a good indicator for Best Buy (BBY), the dark horse retail winner of 2013. Consider that, last quarter, Best Buy derived 29% of business from the consumer-electronics category and 49% from computing and mobile. Appliances represented only 8% for the retailer.

Best Buy shares did trade down Monday in sympathy with hhgregg — yes, it’s pretty scary when your competitor announces a decline of more than 20% in the categories that represent 80% of your business However, there is some good news.

1. You see, hhgregg decided “not to fully participate” in the heavy promotional activity in the most important quarter of the year, according to the press release. That was simply a bad call.

2. Best Buy has declared it will not surrender market share — and, at the other end of the spectrum from hhgregg, Best Buy has also used fighting words (“table stakes”) when talking about the fourth-quarter battle. The company also could not have been clearer in communicating that margin would be traded for sales. Estimates call for a decline of more than 100 basis points in the fiscal fourth quarter.

3. Last quarter, expectations for Best Buy were elevated going into the print, as the Street raised comps estimates in the weeks before the announcement. This quarter, in part thanks to hhgregg, investors are lowering expectations.

4. Best Buy is not hhgregg. While hhgregg has decided to save itself by not competing and adding fitness and home furniture (as referenced above), Best Buy continues to focus on optimizing space in the core relevant categories.

Hhgregg and Best Buy do have something in common: Both had been left for dead in 2012, so each managed massive share climbs last year — 92% for hhgregg and 225% for Best Buy. But, in 2014, merely failing to disappear won’t be enough.Jan 7 2014

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TGT: New Ailment but Don’t Forget Pre Existing Condition

published 12/30/2013

Oh, Tar-jay, you really have blundered this one. After the hacking incident that compromised 40 million Target (TGT) customers’ payment data, between Nov. 27 and Dec. 15, management took its sweet old time and waited till Dec. 20 before announcing it. To add a little salt to the wound, Target confirmed Friday that personal identification numbers (PINs) were also compromised. In a blog, it assured customers that the data was highly encrypted, and should be safe and secure — but, based on the track record of incidents so far, I wouldn’t bet any money on that.

Confused? Please take a number in the Target customer-service line queue and we will see you on New Year’s Day.

Most analysts are trying to figure out the sales impact of the pre-Christmas-weekend hacking announcement, of the plunging customer-satisfaction levels and of the mounting lawsuits. But, while they do that, let us consider Target’s preexisting issues.

First, dilution from the Canada business continues to be one of the largest long-term concerns. Third-quarter dilution was 40% worse than expectations, and the company increased annual dilution by as much as 30%. Current dilution estimates are double the level of the original guidance.

Second, foot-traffic declines accelerated by 130 basis points in the third quarter. Yes, that was worse than Wal-Mart’s (WMT) 40-basis-point decline.

Third, while gross margins are expected to rise in the fourth quarter, this is unlikely if the company has any real intentions of winning back a really angry customer. We know how that is done: price, price, price.

Investors have short-term memories for one-off events like these — for example, TJX’s(TJX) security breach in 2007. One-time charges will also eventually fall into the bucket of a distant memory. However, the core issues for Target may have staying power.

One last factoid to throw in here, assuming consumers do in fact decide that the hacking incident is not a passing threat. Target’s REDcard penetration is 20%, and those customers shop and spend twice as much as non-REDcard customers do. This, therefore, may become the biggest problem of all.

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