The retail sector got pummeled last winter by terrible weather (although this is a common excuse used by companies) and an economic recovery that had still barely touched the middle class, which should set them up for easier year-on-year comps when they start reporting holiday sales figures as early as this week. But a moderately good showing may not be enough to justify recent price moves.
“With gas prices down, equity markets up, and mother nature playing nice, retailers will have no excuses when results start pouring in,” write Sterne Agee analysts Charles Grom, Renato Basanta and John Parke in a January 6 report. “4Q comps will need to be noticeably stronger than market expectations, in our view, as the recent move in the group (up 11.4% since 10/1 vs. SPX up 4.0%) has pushed valuations to extreme levels.”
Costco one of Sterne Agee’s few Buy-rated retailers
Buy-rated Costco Wholesale Corp is one of the only major retailers that the Sterne Agee analysts are currently excited about (they also rate the discount chains Dollar Tree, Inc, Dollar General Corp, and Five Below as Buys). They expect a core comp of about 6% for December, with forex effects and gas deflation 400 – 450 bps drag on the final numbers, and two-year stacked comps to fall from 11% to 11.9%. That could be enough to break the downward trend in comps, though stacked comps would continue to fall.
Target set to clear a low bar, Family Dollar may have a pleasant surprise
You might remember that J C Penney Company (Neutral) disappointed with its brevity during last year’s holiday season update (and the actual numbers themselves weren’t great, once released), and the Sterne Agee report thinks investors should prepare for another non-update this year. They say that even their below consensus 2.5% comps forecast (versus 2.9%) is starting to look high.
Target (Neutral) has a particularly low bar to clear, with -2.5% comps last year, but Grom, Basanta, and Parke don’t expect it to get above 2.0% comps for the quarter based on ‘uninspiring’ checks during the holiday season.
Sterne Agee expects Macy’s Inc. (Neutral) to also have around 2.0% comps for the fourth quarter, at the low end of the 1.8% – 2.8% guidance provided by management. That would be a slight improvement over last year, though two-year stacks would still be down.
Finally, even though the report gives Family Dollar Stores a Neutral rating and predicts flat comps for the fourth quarter, the Sterne Agee analyst have an above-consensus EPS forecast ($0.65 v $0.62) and say that there is a good chance that their comps forecast is too conservative.