Retail sales showed some improvement in the month of October, providing much needed confidence as we head into the ever-important Christmas shopping season. Indeed, with Black Friday just a couple days away, many retailers are hoping that a healthy holiday push will help to make up for what has been an otherwise sluggish year on the retail front.
The Commerce Department said that retail sales, excluding gasoline, autos, building materials, and food services, increased 0.3% in October, the biggest increase since August. For reference, retail sales declined 0.2% in September. Investor sentiment seems to have improved on the sector as a whole, buoyed by lower gasoline prices, a firming housing market, and a declining unemployment rate. Many retailers are banking on these trends to continue to boost consumer confidence and get consumers to open up their wallets. Regardless, the retail space has continued to be home to both winners and losers, making it important that investors make decisions on individual, company-specific merits.
Signs Of Life
Often referred to as the barometer of the U.S. economy, the world’s largest retailer Wal-Mart Stores (WMT- Free Wal-Mart Stock Report) provided somewhat optimistic third-quarter results. Although earnings per share advanced only modestly, the top-line was better than expected. More importantly, perhaps, was the same-store sales growth recorded at the company’s U.S. business. The 50 basis point increase in comp sales was the first positive comparison Wal-Mart registered in the past seven quarters. Ironically, the improvement came despite last November’s cut to food stamps. Higher costs and trouble overseas (namely in Japan) may weigh on the company’s overall profitability in the months ahead, but recent results have us cautiously optimistic about U.S. operations. In that vein, we have a similar outlook for most other domestic retailers.
Industry mate Target Corp. (TGT) seemed to provide similar optimism with its fiscal third-quarter results. Indeed, shares rallied after the mass merchandiser announced better-than-expected earnings and same-store sales for the three months ended November 1st. In fact, comp sales of 1.2% more than doubled management’s guidance, which was calling for a 0.5% advance. Also, Target appears to be making progress with its struggling Canadian venture.
Meanwhile, online retail giant Amazon.com’s (AMZN) third-quarter sales also improved handsomely, though aggressive spending continues to impact the bottom line. Increasingly impatient investors sent the stock trading lower as a result, but top-line metrics support our view of a somewhat improved spending environment.
Out Of Fashion?
That said, there are a number of retailers that still have questions swirling around them. Department store chain J.C. Penny (JCP), for example, continued to disappoint, reporting flat third-quarter comp sales. Wall Street had been calling for a 2%-3% improvement on this front. True, reduced promotional activity is aiding margins, but those same efforts are likely to remain a detriment to the top line. The much-maligned Penney stock continued to fall sharply in response to the aforementioned news.
Many apparel retailers have been suffering a similar fate, with Urban Outfitters (URBN), Abercrombie & Fitch (ANF), and The Gap (GPS) all seeing shares retreat following the release of disappointing sales metrics. As for the latter, it announced that CEO Glenn Murphy will step down as of February 1st, with Art Peck taking over his role. Mr. Peck currently leads the company’s digital division. A fresh perspective out of the corner office may not be the worst thing, given the retailer’s inability to connect with its core customer in the last couple of years.
Ironically, Michael Kors Hldgs. (KORS) was also on the list of stocks that lost ground over the past few moves. KORS, which had been on fire since its late-2011 IPO, saw its shares retreat, despite posting a 43% top-line advance and a 16% improvement in comp sales in the fiscal second quarter ended September 27th. Investors were obviously wanting more after management said that it expects mid-teens sales growth in the December quarter. This illustrates that Wall Street is always looking ahead.