Retail same-store sales came out this morning and are being reported as generally "better than expected." The Breakout crew offered some cause to pause before buying into the current retail stock story.
Matt Nesto started macro, citing recent reports of mall vacancies being at 11-year highs. This is problematic for two reasons. First it's obviously not a trend likely to go away, as online shopping is unlikely to abate in our lifetimes. From an investment perspective, the "undervalued real estate" on many of the Big Box retailers' books is rapidly becoming overvalued. Real estate has been a core argument supporting the undervaluation of the industry, as evidenced by the rabble-rousing of Ackman at Target (TGT) and Eddie Lampert's wildly personally successful purchase and merging of KMart and Sears (SHLD).
Disagree with the point on Big Box's Death? Tell me later; I'm still preoccupied with beating myself up over not being short Best Buy (BBY).
Nesto and I both hit on a few other factors to disregard the hype of today's sales figures. Specifically:
* Retailers have been increasingly open about raising prices to offset inflationary pressures in their sourcing. Higher prices inflate sales figures, at least in the short term, but do nothing to ameliorate margin pressure. Translation: Better sales aren't apt to lead to higher EPS.
* Sentiment is horrible on retail, not just with investors but with the public. Better than expected means little when the bar is set not just low but directly on the floor.
* March is less important this year. Easter is "late" and March has an extra day, according to the always idiosyncratic retail calendar.
* Winter weather led to both pent-up demand and larger than normal clearance sales. Take it from a guy raised in retail; all you need to do to drive higher sales is drip your prices below your cost. You'll end up bankrupt, but your sales will look great on the way. March was a fantastic time to buy a winter coat but a horrible time to have to sell one.
Is our negativity a reason to load the boat on retail stocks? Perhaps. Stranger things have happened than me being wrong. But, as I noted before, I was raised in retail. I see stores the way Neo saw the Matrix, if I do say so myself. I love nothing more than getting long a good retail story. What I see now are unseasonably empty malls, shrinking margins and taxed consumers.
As always, Breakout readers are encouraged to take everything written here with a grain of salt (did I mention salt being yet another consumable ripping higher in price? China just had to institute price limits on salt... but I digress). Buy 'em up if you want but, as for me, I'll be waiting until after the headwinds abate before loading my cart. With retail and all other stocks, I'd rather miss the bottom than anticipate a trend change.
I'm open to other thoughts. Drop your comments below or drop us an email: BreakoutCrew@yahoo.com.