3 Buys & 3 Sells in Retail as Consumer Confidence Drops

Macy’s Inc. (M) and Wal-Mart Stores, Inc. (WMT) reported second quarter earnings this week, and both retail giants failed to live up to revenue expectations. Macy’s sales actually fell during the quarter, surprising analysts who estimated a 2.1% year-over-year increase  to $6.25 billion. The company, which owns Bloomingdale’s as well as its namesake store, ultimately generated $6.07 billion in revenue, 0.8% lower than its $6.12 billion in sales in the second quarter of 2012. CFO Karen Hoguet attributed the drop to consumers mostly making purchases in “non-department store categories such as cars, housing and home improvement.”

Wal-Mart’s consolidated net sales rose by $116.2 billion in the quarter, reflecting a 2.4%, or $2.7 billion, increase from the same period last year. The number fell short of the projected $118.47 billion, and Reuters reports that the stock dropped by 2.1% in premarket trading following the news. In a press release issued earlier today, Wal-Mart U.S. President and CEO Bill Simon cited the payroll tax increase as a challenge amongst the company’s shoppers. Simon also noted in the company’s earnings conference call that extended cool weather had a negative impact on categories with seasonal offerings, specifically sporting goods, toys, and home.

July’s shift in consumer spending

Macy’s CFO Karen Hoguet is right, car sales have played a major role in retail this year. According to data from the Commerce Department, sales in the auto sector comprised 24.2% of total retail sales through June. However, the Department’s latest monthly retail report may indicate that consumers are increasingly willing to spend their money elsewhere.

In its July retail reading, the Commerce Department reported a 0.6% bump in department store sales; a 0.9% increase in sales in clothing and clothing accessories stores; and a 1.0% rise in sporting goods, hobby, book, and music stores sales. Auto sales fell by 1.1%, joined by a 1.4% drop in furniture and home furnishing sales; a 0.4% decline in sales of building material and garden equipment and supplies; and a 0.1% dip in sales at electronics and appliances stores. Overall, retail sales in July totaled $378.65 billion, rising 0.1% from June’s $378.09 billion.

Investing Ideas

On August 4, the Bloomberg Consumer Confidence Index reached -23.5, its highest (yes, highest) reading since January 2008. The high was incredibly fleeting though, as it fell to -26.6 the following week, which was the index’s first decline in a month. The volatility in consumer confidence inspired us to generate two lists pertaining to US retail: one for those who expect consumer confidence to fall due to rising interest rates and other fears, and another for those who expect spending to continue, extending the 4 consecutive month streak of gains in retail.

To begin, we constructed a universe comprised of US retail stocks from the following industries: apparel stores, department stores, electronic stores, home furnishing stores, home improvement stores, jewlery stores, sporting goods stores, and toy and hobby stores. We then screened these stocks  for bearish sentiments from institutional investors, with significant net institutional sales representing at least 5% of share float over the last quarter. This indicates that institutional investors such as hedge fund managers and mutual fund managers expect these companies to underperform.

Next, we looked for a fundamental indicator that could explain why institutional investors have lost faith in these firms. We screened for stocks with negative sales trends as illustrated by slower growth in revenue than growth in inventory over the last year. Inventory represents the portion of goods not yet sold, so when revenue grows at a slower rate than inventory, it suggests that a company is having difficulty selling its products. This is viewed as a discouraging sign.

We were left with three stocks on our list.

Click on the image below to see sales data over time. Quarterly sales data sourced from Zacks Investment Research.

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Do you think institutional investors are wise to sell these stocks before back-to-school season starts? Use this list as a starting point for your own analysis.

1. rue21, Inc. (RUE, Earnings, Analysts, Financials): Operates as a specialty apparel retailer in the United States.

Market cap at $992.85M, most recent closing price at $41.85.

Net institutional sales in the current quarter at -3.3M shares, which represents about 21.64% of the company's float of 15.25M shares.

Revenue grew by 9.12% during the most recent quarter ($224.38M vs. $205.62M y/y). Inventory grew by 27.53% during the same time period ($168.2M vs. $131.89M y/y). Inventory, as a percentage of current assets, increased from 54.55% to 66.19% during the most recent quarter (comparing 13 weeks ending 2013-05-04 to 13 weeks ending 2012-04-28).

2. J. C. Penney Company, Inc. (JCP, Earnings, Analysts, Financials): Operates department stores in the United States and Puerto Rico.

Market cap at $2.88B, most recent closing price at $13.11

Net institutional sales in the current quarter at -16.7M shares, which represents about 16.43% of the company's float of 101.67M shares.

Revenue grew by -16.4% during the most recent quarter ($2,635M vs. $3,152M y/y). Inventory grew by -9.27% during the same time period ($2,798M vs. $3,084M y/y). Inventory, as a percentage of current assets, increased from 65.87% to 71.16% during the most recent quarter (comparing 13 weeks ending 2013-05-04 to 13 weeks ending 2012-04-28).

3. GameStop Corp. (GME, Earnings, Analysts, Financials): Operates as a retailer of video game products and personal computer (PC) entertainment software.

Market cap at $5.76B, most recent closing price at $48.69.

Net institutional sales in the current quarter at -10.7M shares, which represents about 9.31% of the company's float of 114.97M shares.

Revenue grew by -6.84% during the most recent quarter ($1,865.3M vs. $2,002.2M y/y). Inventory grew by -0.53% during the same time period ($1,112.3M vs. $1,118.2M y/y). Inventory, as a percentage of current assets, increased from 68.37% to 71.19% during the most recent quarter (comparing 13 weeks ending 2013-05-04 to 13 weeks ending 2012-04-28).

 

The second list

We returned to our initial universe of US retail socks, this time focusing on companies with positive sales trends. We screened for stocks experiencing faster growth in revenue than inventory over the last year. If revenue is growing faster than inventory, it speaks to a company’s efficacy in selling its products. This is viewed as an encouraging sign.

To further narrow down the list, we looked for potentially undervalued stocks as indicated by a low Price/Sales (P/S) ratio. When a stock has a low P/S ratio, it means that its price is cheap when compared to what the company generates in revenue. A stock with a P/S below 1 can be considered undervalued. However, investors should note that this ratio doesn’t take expenses or debt into consideration, and variation between industries is normal. To create the following list, we screened for stocks with P/S ratios under 2, which means that the company’s market cap isn’t greater than 2x its annual sales.

We were left with three stocks on our list.

Click on the image below to see sales data over time. Quarterly sales data sourced from Zacks Investment Research.

Your browser does not support iframes.

Do you think these stocks will be able to sustain their positive sales trends? Use this list as a starting point for your own analysis.

1. Christopher & Banks Corporation (CBK, Earnings, Analysts, Financials): Operates as a retailer of women's apparel in the United States.

Market cap at $238.91M, most recent closing price at $6.60.

Revenue grew by 15.92% during the most recent quarter ($108.52M vs. $93.62M y/y). Inventory grew by -3.17% during the same time period ($43.04M vs. $44.45M y/y). Inventory, as a percentage of current assets, decreased from 54.26% to 46.67% during the most recent quarter (comparing 13 weeks ending 2013-05-04 to 13 weeks ending 2012-04-28).

Price/Sales ratio: 0.54.

2. The Men's Wearhouse, Inc. (MW, Earnings, Analysts, Financials): Operates as a specialty retailer of men's suits in the United States and Canada.

Market cap at $2.B, most recent closing price at $39.60.

Revenue grew by 5.11% during the most recent quarter ($616.54M vs. $586.57M y/y). Inventory grew by -1.25% during the same time period ($598.92M vs. $606.52M y/y). Inventory, as a percentage of current assets, decreased from 70.45% to 67.67% during the most recent quarter (comparing 3 months ending 2013-05-04 to 3 months ending 2012-04-28).

Price/Sales ratio: 0.80.

3. The Home Depot (HD, Earnings, Analysts, Financials): Operates as a home improvement retailer.

Market cap at $113.68B, most recent closing price at $77.44.

Revenue grew by 7.39% during the most recent quarter ($19,124M vs. $17,808M y/y). Inventory grew by 2.1% during the same time period ($11,825M vs. $11,582M y/y). Inventory, as a percentage of current assets, decreased from 66.75% to 63.51% during the most recent quarter (comparing 13 weeks ending 2013-05-05 to 13 weeks ending 2012-04-29).

Price/Sales ratio: 1.49.

 

(List compiled by Mary-Lynn Cesar. Institutional data sourced from Fidelity. Accounting data sourced from Google Finance. All other data sourced from Finviz.)

 

 

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Dig Deeper: Access Company Snapshots, Charts, Filings

rue21, Inc. (RUE, Chart, Download SEC Filings) J. C. Penney Company, Inc. (JCP, Chart, Download SEC Filings) GameStop Corp. (GME, Chart, Download SEC Filings) Christopher & Banks Corporation (CBK, Chart, Download SEC Filings) The Men's Wearhouse, Inc. (MW, Chart, Download SEC Filings) The Home Depot (HD, Chart, Download SEC Filings)

 

 

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