If you’re sick of talking the weather this is going to be a long week. Not only is winter storm Rex going to be hammering the Northeast but we’re going to hear earnings reports from consumer-facing companies, nearly all of whom will blame weak sales on the extreme weather of 2014.
Under normal circumstances blaming the weather is an unpardonable excuse for a lack of execution. There’s weather every year. If it’s cold a company should be nimble enough to carry more winter coats. Where civilians see torrential rain as a problem, retailers see it as a chance to sell sandbags and parkas.
This year, for the first time in history, retailers and casual dinners have a pretty viable excuse. Consider:
· Even before last weekend 71,000 flights had been cancelled since January 1st due to inclement weather nationwide, about twice the normal rate.
· In the eastern half of the country alone snow and sleet have resulted in the cancellation of 49,000, more than twice the number caused by Superstorm Sandy.
· GDP estimates are falling with the weather as state and high-cost repairs render municipal budget planning obsolete. Chicago for instance has already spent more than $25 billion on snow removal, 25% over its budget for the entire winter.
· The storms have hit with cruel timing. Thanksgiving, Christmas and last weekend’s three day holiday all featured massive travel delays.
So the retailers will get a pass for blaming the weather if their margins are thin and their inventory levels are bloated. That’s fine for a company like Walmart (WMT) which has the financial stability to withstand a down quarter or two. It’s the retailers with heavy debt burdens that are going to be hammered by Old Man River.
Retailers need to get rid of old merchandise to be in seasonal stock. For companies still lugging around inventory from Christmas, the storm over President’s Day Weekend struck just in time for the rollout of spring merchandise. That’s a cruel double whammy when you’ve got impatient vendors waiting to get paid.
What to watch
As the retailers and casual diners start reporting expect companies with heavy debt loads to get hit the hardest. Radio Shack (RSH) and JC Penney (JCP) make particularly interesting bookends as both companies are stuck in the middle of remodels with limited resources available to pay for them. It’s no coincidence that the stocks have taken a beating in 2014.
Another factor to consider are companies that have recently raised debt to buy back shares. Tim Horton (THI) and Zale (ZLC) both report this week. Both are relatively low-margin and reliant on traffic flow. There are many key differences between the chains but the one that matters this week when the two companies report are their relative debt positions. Zale’s sells largely unseasonal merchandise and maintains an absurdly levered 3.3 debt to equity ratio. Tim Horton has a debt to equity ratio under one and it’s only that high because activists pressured it to raise debt for a buyback last year.
Zales has been a rocket ship of a stock for the last year but it’s put a lot of pressure on itself for this report. It would be ironic to see the company’s shares get hit because of a lack of liquidity during the wettest winter in 30 years.
- Natural Phenomena