If bad weather really was to blame for retail’s weak first quarter results, then it stands to reason that we should see a rebound now that the weather is warming up. Based on weekly checks, Janney Capital Markets sees evidence that traffic is picking back up for retail softlines, but promotions are still high and second quarter earnings may also be at risk.
Retail traffic is spiking on weekends, but still up from last quarter
“Over the weekend, we witnessed similar mall traffic to last weekend as pent-up demand continues to drive need-based purchasing,” writes Janney Capital Markets analyst Adrienne Tennant in a May 21 report. “However, that traffic spikes on the weekends and then we see lull periods mid-week.”
Tennant speculates that online and direct-to-consumer (DTC) sales are making up for at least some of the mid-week slack, but the discrepancy does increase volatility and could make it difficult to estimates quarterly earnings. What’s more problematic is evidence of “marginal bleeding of promotional pressure from 1Q14 into 2Q14.” Of the 25 retail stores checked last week, only five were rated as improving (in the sense of having fewer promotions year-on-year) while the rest were either flat or offering deeper discounts than at this time last year.
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There’s a limit to how much pent up demand from the first quarter can improve second quarter numbers (anyone who skipped on a new winter coat will just wait til next year, for example), but promotional pressure can damage margins year round.
Abercrombie & Fitch, New York & Company stand out among retail softlines
Tennant highlights Abercrombie & Fitch Co. (NYSE:ANF) and New York & Company, Inc. (NYSE:NWY), both Buy rated, as two of the more attractive stocks in a difficult sector. Abercrombie & Fitch has been improving its inventory this quarter, with lower levels of clearance items, and Tennant sees the potential for a small EPS beat, gross margin improvement and recovering (but still negative) comps.
“ANF is our pick in the Teen space as a 2H14 margin recovery play,” Tennant writes.
Recent checks have found that New York & Company, Inc. (NYSE:NWY) has regular stockouts of smaller sizes in spring/summer Missy product lines both in stores and online, showing that the company has managed to home in on what its audience is looking for. Tennant believes that an upcoming earnings call will highlight this growing momentum, calling NWY a “small cap, speculative beta play for 2014.”