We’ve heard it all this August—slumping consumer confidence combined with timing delays were going to hammer retail sales growth during the back-to-school season. On the contrary, August revealed some of the strongest data in months. We dig into the winners, and we dig into the losers—but there weren’t many of the latter.
The strongest performer of the bunch was luxury retailer Nordstrom (click ticker for report: ), which posted aggregate same store sales growth of 21%, thanks to 24% expansion at Nordstrom and 7.1% growth at Nordstrom Rack. The headline growth number sounds incredible, but it was positively impacted by 8 days of the Nordstrom Anniversary Sale moving into August. Still, the firm posted an 8.4% June and July comp, which is strong for a company connected so closely with aspirational spending. Still, shares trade just above the midpoint of our fair value range, so we aren’t enthralled about the firm’s return prospects from these levels. However, we do love its decision to double Nordstrom Rack stores by 2016.
Another aspirational retailer, Limited Brands (click ticker for report: ), owner of Victoria’s Secret, Henri Bendel (but oddly no longer the owner of The Limited) and Bath and Body Works, saw same store sales rise 8% year-over-year during August. Same store sales at Victoria’s Secret increased 9% year-over-year, and we continue to be impressed with the brand’s ability to raise prices and drive product innovation. Though the US market for the underwear maker is mostly saturated at this point, the brand has a solid reputation and continues to exceed consumer and investor expectations. Nevertheless, scoring a 3 on our Valuentum Buying Index (our stock-selection methodology) doesn’t get us too excited about the Limited’s investment prospects at this time.
Unlike Nordstrom, which has continued to post strong comps nearly every month, Macy’s (click ticker for report: ) hasn’t had robust sales growth though the course of 2012. However, August was an exception, with total sales growing 5.7% year-over-year, to $1.8 billion, on a strong 5.1% same store sales advance. CEO Terry Lundgren made no mention of overly promotional activity during the back-to-school season (which we like), but he did point to continued excitement surrounding new merchandise. This harkens back to the strategy Lundgren implemented a few years ago, giving regional purchasing managers discretion on product mix, which has improved inventory turns and unique regional assortments. It also doesn’t hurt that competitor J.C. Penney (click ticker for report: ) is in the midst of a major transformation. Though the retailer scores just a 3 on our Valuentum Buying Index, we think Macy’s shares could have further valuation upside ($66 per share is the high end of our fair value range).
Kohl’s (click ticker for report: ), a name we’ve been skeptical about during the past few months, reported surprisingly strong results for August, with total sales growing 5.3% and same store sales growing 3.4%. Kohl’s CEO Kevin Mansell noted cleaner inventory and better merchandise as primary growth drivers, a view we agree with. Unfortunately, the retailer lags others in time to market and caters to a consumer that has continued to struggle through 2011 and 2012. Still, we can’t help but think J.C. Penney’s lack of discounting and Sears’ (click ticker for report: ) practically non-existent apparel strategy has made the heavily-promotional retailer look relatively more attractive for bargain hunters. Though we don’t think Kohl’s shares are particularly expensive at current levels—even trading at a discount to the midpoint of our fair value range—we are still weary of the firm’s long-term prospects.
Competition from off-priced brand competitors TJ Maxx (click ticker for report: ) and Ross Stores (click ticker for report: ) pose the largest threat to Kohl’s, in our view. TJ Maxx saw revenue growth of 10%, leading to sales of $1.9 billion during August on 8% consolidated same-store sales growth (9% at Marmaxx). Waves of consumers continue to select brand names at low prices, and the firm indicated that fiscal third-quarter earnings should be at the high-end of its previously-issued guidance range. Recently, consumers have become increasingly more attracted to strong brand names, so we’re not at all surprised by TJ Maxx’s positive momentum.
Ross, TJ’s smaller competitor, reported 13% top-line growth during August thanks to 8% same store sales growth. Ross provides virtually the same type of experience as TJ Maxx and Marshall’s, though we’ve noticed pricing on some of its items is marginally better. With both retailers offering consumers brand names at comparable prices to Kohl’s and JC Penney, we think both retailers will continue to thrive. Still, we’re not fans of either company’s valuation at current prices. We’d only like to pick them up at a very steep discount to intrinsic value on improving technical and momentum indicators.
The Gap (click ticker for report: ), which we think is back, reported fantastic August results. Same store sales grew 9% at Gap North America, 8% at Banana Republic North America, 12% at Old Navy and 2% internationally, leading to consolidated growth of 9%. The retailer now understands the importance of quick inventory turns in a fashion world that changes rapidly due to disruptive forces like Instagram (click ticker for report: ), Twitter and Tumblr. Buckle (click ticker for report: ) also reported strong 4.5% same-store sales growth, though we don’t like its business nearly as much as we like Gap’s. We’re not fans of either at current levels.