Some Caveats On The Retail Recession

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Last week was all about the big department stores – Macy’s (M), Kohl’s (KSS) and Nordstrom’s (JWN) – and their sales failures.  This week is all about a number of retailers who have been doing quite well up until now and who will release earnings reports this week and next.

Let’s start with the discounters, TJ Maxx (TJX) and Ross Stores (ROST), who we will hear from later this week.  In February, TJX reported 5% comparable store sales for the year ended Jan 30, 2016 and forecast a 1-2% increase for the coming year.  The stock is near all time highs.  They will report 1st quarter results Tuesday morning.

The story at Ross Stores (ROST) is similar.  Comparable stores were up 4% for the year ended Jan 30, 2016 and they forecast a 1-2% increase for this fiscal year.  The stock is near all time highs.  ROSS will report 1st quarter results Thursday after the close.

Second, let’s consider the home improvement retailers, Home Depot (HD) and Lowe’s (LOW).  HD reported 5.6% comparable store sales growth for the year ended Jan 31, 2016 and forecast 3.7%-4.5% for the current year.  HD stock is trading near all time highs.  They will report 1st quarter earnings Tuesday morning.

Lowe’s (LOW) reported a 4.8% increase in comparable stores for the year ended Jan 29, 2016 and forecast a 4% increase for the current year.  LOW stock is trading near all time highs.  They will report earnings on Wednesday morning.

Beauty retailer Ulta Cosmetics (ULTA) is on fire.  Comparable store sales increased 11.8% for the fiscal year ending Jan 30, 2016 and ULTA forecast an 8-10% increase for this fiscal year.  The stock is near all time highs.  They will report 1st quarter earnings next Thursday (5/26) after the market close.

Finally, Amazon (AMZN) continues to take share from brick and mortar retailers.  For the quarter ended Mar 31, 2016, AMZN reported a 28% increase in revenue.  The stock is at all time highs.

One can therefore ask: Is retail really in recession as I claimed last week?

First, I realized my own confirmation bias in last week’s terrible reports and wanted to counteract that.

Second, another thing I noticed in studying these companies that are doing well is how much they are borrowing to buy back stock.  Financial engineering abetted by low interest rates is playing a big role in squeezing EPS higher.  HD bought back $7 bil in stock in each of the last 2 years, lowering their diluted share count by 4.7% last year.  LOW bought back $3.9 bil in each of the last two years, lowering their diluted share count by 6.2% last year.  HD issued about $6 bil and LOW $3 bil in long term debt over the last 2 years to partly help finance these buybacks.

Third, valuations for these high performing companies are quite high.  HD, TJX and ROST are all trading at multiples of forward earnings in the low 20s and LOW is at 19x.  AMZN, of course, is barely profitable and remains a conundrum.  ULTA trades at about 35x forward earnings.

The next couple weeks will tell us quite a bit about the consumer and if last week’s earnings report were merely company specific or represent broader economic weakness.

Greg Feirman

Founder & CEO

Top Gun Financial (www.topgunfp.com)

A Registered Investment Advisor

Bay Area, CA

(916) 224-0113