The week ending January 10 brought a plethora of news that confirmed our fears: promotional activity during the shortened holiday shopping season of 2013 wasn’t just bad, it was cutthroat. Many retailers were left unable to recover from the ice and winter storms that ravaged much of the US during December/early January. Bed Bath and Beyond (BBBY) Five Below (FIVE), Pacific Sunwear (PSUN), Sears (SHLD) and Zumiez (ZUMZ) all revealed difficult performance during the period.
The variant business models of the aforementioned retailers suggest weakness was widespread. Surprisingly, even discount retailing giant Family Dollar (FDO) wasn’t able to lower prices enough to keep customers in the stores. No category seemed to be spared. Needless to say, we’re not expecting much from retailers when they report fourth quarter results in coming weeks, and while firms such as Macy’s (M) and Urban Outfitters (URBN) offered some positive news this week, on balance the performance was “mostly bad” in the sector. Any upside surprises from retailers during fourth-quarter earnings season will be met with much applause by the equity markets, as it will reveal a management team that knows how to deliver. Still, a fourth-quarter beat is hardly any reason to own shares.
The Bad
Bed Bath & Beyond
Domestic home furnishings retailer Bed Bath & Beyond surprised the markets Wednesday by missing fiscal third-quarter expectations (ended November 30, 2013) on both the top and bottom line and issuing fiscal fourth-quarter guidance well below consensus targets. Comparable sales growth slowed from the pace achieved in the prior-year period, and the company’s gross margin fell as a result of the increased promotional environment during the shortened holiday season. The competitive environment has sent earnings expectations at the retailer in a tailspin, as shown below:
The company is now modeling net earnings per diluted share to be approximately $1.60 to $1.67 for the fiscal fourth quarter of 2013, as compared to our previous model of $1.70 to $1.77, and to be approximately $4.79 to $4.86 for the full year, which will include Cost Plus, Inc. (“World Market”) and Linen Holdings for all of fiscal 2013, as compared to our previous model of $4.88 to $5.01.
Family Dollar
On Thursday, Family Dollar reported financial results for first quarter 2014 (ended November 30, 2013). The firm’s comparable store sales decreased 2.8% for the period “as a result of decreased customer transactions and a slight decrease in the average customer transaction value.” Family Dollar slashed its earnings outlook for the fiscal second quarter and the year, to $0.85-$0.95 (versus $1.21 in last year’s quarter) and $3.25-$3.55 (versus $3.83 in last fiscal year), respectively. These cuts are steep.
“Many of the top-line challenges we faced in the first quarter, including a challenged consumer and an intensified promotional environment, have continued to impact our business. Comparable stores sales for December decreased about 3%, driven primarily by a decline in customer transactions. In addition, we reacted to softness in discretionary categories by leveraging promotions more than we originally planned,” said Levine. “Reflecting our December results, our expectations that the macroeconomic trends will continue, and the impact of investments we plan to make to strengthen our value proposition, we have lowered our earnings expectations for the second quarter of fiscal 2014 and the full year.”
“While a difficult operating environment will likely challenge earnings growth in the near-term, I am confident that these investments will improve our competitiveness, strengthen customer loyalty, increase our market share and position us to deliver stronger earnings growth in early fiscal 2015.”
When a discount, trade-down retailer notes that the promotional environment intensified, we have to take notice, especially when its Chief Operating Officer leaves the company to pursue other interests. Family Dollar may be pressured for some time, and management’s commentary for stronger earnings growth in early fiscal 2015 makes us wonder how bad fiscal 2014 (the current year) will be. It is clear to us that Dollar General (DG) is operating on a higher level.
Five Below
Specialty value teen and pre-teen retailer, Five Below updated fourth quarter fiscal 2013 guidance Thursday, and the update wasn’t pretty. Comparable store sales for the nine-week period decreased 0.5%, and the company now expects net sales for the fourth quarter of fiscal 2013 to be in the range of $208-$210 million (was $214-$217 million), comparable store sales to be in the range of -1.5% to -0.5% (was +4%) and GAAP diluted income per share of $0.43-$0.45 (was $0.48-$0.50). These are some fairly hefty downward revisions brought about by the shortened holiday shopping season, exacerbated by poor weather conditions.
Thomas Vellios, Co-Founder and CEO, stated: “We did not meet our sales expectations for the holiday season as adverse weather negatively impacted traffic to our stores, which are heavily concentrated in the Northeast and Midwest regions. This was exacerbated by the shortened holiday season during which we simply did not make up the weather-driven sales shortfall, especially in those key shopping days just prior to Christmas…While clearly disappointed with our holiday comparable store sales performance, we continue to be pleased with the performance of our new stores, in particular the performance of the new Texas market.”
Pacific Sunwear
It’s probably not too surprising that a firm striving to deliver all aspects of the ‘California’ lifestyle would struggle amid icy winter storms across the US, but Pacific Sunwear did Thursday, nonetheless. The company noted that comparable store sales through January 4, 2014 (the “holiday period”) were flat on a continuing operations basis, excluding online sales. Including online sales, comparable store sales edged up modestly, a showing that was below expectations. The performance prompted the company to lower its non-GAAP bottom-line outlook for the fourth quarter of fiscal 2013 to the range of $(0.21) to $(0.18) per share and its revenue target to $211-$214 million (was $216-$225 million).
“After a strong start to the holiday season in November, the first three weeks of December were significantly below our expectations primarily due to a decrease in traffic and softness in denim. Business picked up in the final few days prior to Christmas and then finished the month strong as self-shoppers came back to the mall. Overall, it has been a choppy holiday season and we now expect fourth quarter comparable store sales to be flat to 1%, compared to last year,” said Gary H. Schoenfeld, President and Chief Executive Officer.
Sears
We weren’t expecting anything but poor performance from Sears, but the retailer managed to miss even our lowered expectations when it provided an update Thursday. Comparable store sales for the quarter-to-date and year-to-date periods ended January 6, 2014, were abysmal at the company’s Kmart and Sears Domestic stores. The performance even revealed that sales are accelerating to the downside (quarter-to-date declines are worse than year-to-date declines), and the weakness was prevalent across the board. The company now expects to report an adjusted operating earnings-per-share loss of $2.01-$2.98 during the quarter ending February 1, 2014 and a loss of $11.85-$12.88 per share for the year. Sears’ operational days are numbered, with only a real estate liquidation scenario providing any real hope to shareholders. We note, however, that the real-estate thesis is getting crowded, too (see here).
Total domestic comparable store sales for the quarter-to-date period declined 7.4% (year-to-date= -3.9%), comprised of decreases of 5.7% at Kmart (year-to-date= -3.7%) and 9.2% at Sears Domestic (year-to-date= -4.2%). Kmart’s quarter-to-date comparable store sales decline reflects declines in most categories including consumer electronics, grocery & household and toys. Sears Domestic’s quarter-to-date comparable store sales decline is attributable to decreases in most categories including consumer electronics, tools and home appliances. Sears Canada comparable store sales for the quarter-to-date period ended January 6, 2014 were -4.4%.
Zumiez
Specialty action-sports retailer Zumiez announced that the company’s comparable store sales decreased 2.4% for the five-week period ended January 4, 2014, compared to a decline of 1% in the period a year ago. The firm had the following to add about how both sales and margin pressure damaged performance in the holiday period:
Based primarily on lower than planned sales quarter-to-date, and to a lesser extent lower than planned merchandise margins, the Company is revising guidance and now expects fiscal 2013 fourth quarter sales in the range of $226 to $229 million and net income per diluted share of approximately $0.56 to $0.59, a decrease from the previously issued guidance of sales in the range of $230 to $237 million and net income per diluted share of approximately $0.60 to $0.66. This guidance is now predicated on a low single digit comparable store sales decrease for the fourth quarter and includes a previously-disclosed estimate of $1.7 million, or approximately $0.05 per diluted share, for charges associated with the acquisition of Blue Tomato.
The Good
Abercrombie & Fitch (ANF)
Even some of the good news wasn’t all that good. Abercrombie & Fitch reported better-than-expected same store sales Thursday, but better-than-expected still meant declines of 6%; comparable US sales fell 4% and comparable international sales dropped 10%. Expectations were so low that even this mid-single-digit decline prompted the firm to raise its earnings outlook for the year, to $1.55-$1.65 (was $1.40-$1.50). Still, Abercrombie & Fitch couldn’t help but mention the intensely, competitive environment, which we think is more informative of operating conditions than its results, which can best be described as less-than-terrible:
Mike Jeffries, Chief Executive Officer and Chairman of the Board of Abercrombie & Fitch Co., said: “Given the challenging and promotional retail environment, we are pleased that our quarter-to-date performance has exceeded expectations. Our direct-to-consumer business was particularly strong, reaching a record level of approximately 25% of total sales in December, and we also saw sequential improvement in comparable store sales. In addition, fall season carryover inventory levels are well controlled as we move into the new season.
Costco (COST)
Another retail outliner during the week was Costco. On Thursday, the warehouse operator reported decent comparable sales, but this followed weaker than expected performance in November. Total company comparable sales growth for the 5 weeks ended January 5, 2014, was 3% or 5%, excluding negative impacts from gasoline price deflation and foreign exchange. Though this matches the pace of same-store sales performance during the 12 weeks ended November 24, 2013, underlying performance in its US and International segments was modestly better during the past 5 weeks. Still, the release did more to alleviate concerns than reveal accelerated same store sales expansion at the firm.
Gap (GPS)
The same could be said about Gap. The retailer’s comparable sales growth for December 2013, released Thursday, was flat versus a 5% increase for December 2012. Gap Global recorded a positive 1% showing, Banana Republic Global’s performance was flat, while Old Navy Global tumbled 2%. This is hardly news worth writing home about, but the retailer did indicate that it was comfortable delivering at the high end of its guidance range of $2.57-$2.65 for fiscal 2013. Where most news from the retail sector has been bad, we’re accepting Gap’s performance in a positive light.
Macy’s
On Wednesday, Macy’s reported decent comparable sales expansion during the months of November and December combined. Comparable sales advanced 3.6% in the November/December period, while together with comparable sales from departments licensed to third parties, the same store sales performance was even better (4.3%). The commentary was very positive as well, a true outlier in the retail space:
“The 2013 holiday season was successful for Macy’s and Bloomingdale’s as we offered fresh and distinctive merchandise, delivered great value to the customer and provided a robust omnichannel shopping experience which served our customers whenever, however and wherever they chose to shop and to buy,” said Terry J. Lundgren, Macy’s chairman, president and chief executive officer. “Even in a questionable macroeconomic environment with challenging weather in multiple states, the positive response from our customers during the holiday season is yet another vote of confidence that our well-established strategies continue to work for us.”
Macy’s also provided strong initial guidance for fiscal 2014. The retailer expects comparable sales for the year to increase in the range of 2.5%-3% compared with 2013 levels and achieve earnings per share in the range of $4.40-$4.50. On top of the solid sales data and encouraging 2014 outlook, management announced cost-reduction initiatives to add flexibility to hit its bottom-line targets. We liked the news at Macy’s.
Urban Outfitters
Along with Macy’s, Urban Outfitters may have been one of the only true positive performances, but management also spoke to an extremely promotional retail environment and its stock price (valuation) already speaks of sales resiliency. The specialty retailer noted Thursday that comparable retail segment net sales advanced 3% in the two months ended December 31, 2013. Comparable retail segment net sales increased 21% at Free People and 11% at Anthropologie and decreased 6% at its branded Urban Outfitters stores. Its wholesale segment net sales jumped more than 20% over the time period.
“I am pleased to announce record URBN sales for the 2013 Holiday period,” said Richard A. Hayne, Chief Executive Officer. “Our Anthropologie and Free People brands delivered outstanding results despite the extreme promotional retail environment,” finished Mr. Hayne.
Valuentum’s Take
The holiday shopping season appears to have been one of the most competitive in a while, one that was exacerbated by the extremely cold December/early January weather across much of the US. We don’t hold any retailer in the actively-managed portfolios, and you can probably see why after reading this article. We view Macy’s and Urban Outfitters’ performances as perhaps the only true outperformers in the period and believe that J.C. Penney (JCP) and Sears remain in dire straits (see here and here, respectively). We’re monitoring retail very closely, but we’re not expecting results to be anything but at the lower end of expectations in the fourth quarter.
Retail – Apparel: AEO, ANF, ARO, COLM, GES, GIL, GPS, HBI, ICON, LB, ROST, URBN, ZQK
Retail – Discount: BIG, DG, DLTR, FDO, FRED, PSMT
Retail – Multiline: DDS, JCP, JWN, KSS, M, SHLD, SKS