With the massive amount of negativity in the media surrounding the US economy, one would assume that consumer spending has come to a grinding halt. However, let’s dig into July same-store sales trends and analyze some bright spots in the retail sector.
Macy’s, Saks and Nordstrom – Affordable Luxury Stronger Than Expected
The affordable luxury segment held up reasonably well through July. Macy’s (click ticker for report: ) reported same-store sales growth of 4.1% during the month. Online sales for Macy’s also grew 35.1% during July, underscoring the strength of the firm’s online offerings and its effectiveness in the ecommerce space. Though we think the company is performing relatively well, the firm registers just a 3 on our Valuentum Buying Index, so we’d wait for shares to pull back before getting interested.
Same-store sales for Saks (click ticker for report: ) grew 3.5% during July, which was slightly short of expectations, but a solid number nonetheless. The firm pointed to strength pretty much across the board, but did have an Electronic Gift Card event that it said positively impacted same-store by 200 basis points. We’re not fans of the retailer at these levels, and we think traction at the high end department store may be slipping.
In between Saks and Macy’s lies Nordstrom (click ticker for report: ). Nordstrom stores have a pricing scale toward the high-end of Macy’s and the low-end of Saks, so we think the firm is a great representative of affordable luxury. July same-store sales increased just 0.9%, driving total sales to $1 billion. Yet, that was better than the decline of 2.7% the Street had predicted. Sales were negatively impacted by the Nordstrom Anniversary Sale moving partially into August. Its namesake Nordstrom stores had comparable sales growth of 1.3%; however, the primary growth driver was the 9.7% same-store sales acceleration from its discounting child, Nordstrom Rack. It appears customers are becoming more value conscious, as we’ll discuss later, which is positively impacting Nordstrom Rack. Though results were relatively strong, shares of the retailer are trading near our fair value estimate, so we aren’t very bullish on the total return prospects at this time. Additionally, while revenue may continue to grow thanks to strong sales at Nordstrom Rack, gross margins could suffer.
Discounters Continue To Shine
In the off-priced brand name space, Ross Stores (click ticker for report: ) continues to win the wallets of consumers. The firm reported same-store sales growth of 7% for the month of July, well ahead of the consensus expectation of 4.5% growth. Total sales grew 12% to $709 million. We suspect the back-to-school season will be terrific for Ross, as consumers seem to love searching the store for bargains. Regardless, we aren’t fans of the valuation at current levels, though we wouldn’t be lining up to bet against the firm.
Similarly, Ross’ larger competitor TJ Maxx (click ticker for report: ) reported fantastic July results. Same-store sales rose 7% compared to a 5% estimate, propelling total sales 8% higher to $1.6 billion. Management specifically pointed to increased traffic as the main driver, which we view as further evidence that consumers are actively seeking deals. It also points to the fact that consumers do not want to stop spending, but when they do spend, they want value.
Gap and Kohl’s Also Solid…
Gap (click ticker for report: ) and Kohl’s (click ticker for report: ) are not similar in merchandise or apparel, but both reported much stronger than expected July results. At Gap, same-store sales surged 10% at a company-wide level, driven by 13% same-store sales growth at namesake Gap stores, 8% growth at Banana Republic, 12% growth at Old Navy, and 4% growth at international locations. Gap has struggled for the past several years, but appears to be on-track with better product offerings. Ultimately, we’re not fans of the shares at current prices, but would be interested if they fell below the low end of our fair value range.
Kohl’s has also struggled mightily recently, but same-store sales in July grew 1.7% compared to the Street’s flat expectation. Still, same-store sales, year-to-date, are down 1.3%, and we continue to question the firm’s long-term viability. We’re skeptical about the firm’s ability to keep up with its fast fashion competitors and are eager to see how the back-to-school season plays out.
…But Abercrombie Tumbled
We’ve never been fans of the highly cyclical and volatile teen retailer industry, and Abercrombie & Fitch’s (click ticker for report: ) second quarter simply reinforced that view. Same-store sales plummeted 10%, driven by a 5% decline in the US and a 26% fall internationally. The firm also slashed its full-year earnings per share guidance to $2.50 to $2.75, down substantially from its previous $3.50 to $3.75 prediction. Shares look cheap on a discounted cash flow basis, and Abercrombie suffered from similar problems a few years ago. We suspect the firm will be highly promotional in the back half of 2012, leading to declining margins, though sales may hold up relatively well. Still, we are not eager to commit capital to a company in such a highly competitive and changing industry.