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Weather report: Cloudy with a chance of falling retail stocks

Jeff Macke
Breakout

Weather report: Cloudy with a chance of falling retail stocks

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Weather report: Cloudy with a chance of falling retail stocks

Weather report: Cloudy with a chance of falling retail stocks
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We’re about to hear earnings reports from retailers this week and if you’re already sick of talking about the weather this year it’s about to get worse. Macy’s (M), Target (TGT) and Home Depot (HD) are all going to report and I personally guarantee the weather comes in every single one of their releases.

Of the weather, Simon Baker of Baker Ave Management says the stores get a pass this time. “They always have an excuse, now this year even more,” Baker says. “But with the good companies this is a good time to increase the quality of the portfolio.” In other words, it might be time to buy a dip or two.

The only real question for traders and investors is whether or not the climate is going to be a real headwind for the stocks. In retail, blaming weak results on the weather is a bit like an athlete attributing failure to an exaggerated injury. It’s worse than a confession of failure. It’s beyond a little white lie.

If you’re analyzing a retailer and it blames weak results on weather you can assume that either management is untrustworthy or obtuse. There’s always weather. If it rains you sell umbrellas and if it’s sunny you sell shadows. Retail exists to provide a supply of goods or services being demanded by customers. Shoppers buy to fit a relatively small range of seasonal temperatures. They buy bathing suits for the day and a sweater in case it gets nippy.

High volatility in weather patterns creates demand. That’s the case over time anyway. This year saw near-record lows simultaneously and at extremes. The ability to execute inventory distribution to the areas of high demand was disrupted. For every one of the pictures of the empty shelves of some looted retailers there were other of the same companies with fully stocked stores.

They just could move the merchandise. This time for the first year in the history of retail weather matters. Merchants will be forgiven for missing last quarter and being nervous beyond Q2 but Wall Street will absolutely hammer the stocks of the retailers that are still flat-footed. After the last four months any team of managers betting on steady weather is going to be out of a job.

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