The 5 Retailers with the Heaviest Downward Revisions Ahead of this Week’s Reports – M, SHOO, CHS, GPS, JCP
The fourth quarter earnings season has been, in a word, underwhelming. Beat rates are at a historical low for companies within the S&P 500, with only 54% able to beat on the bottom-line, and 41% on the top-line. As it usually does, the quarter will wrap up with the retail earnings parade. This week’s 5 Stocks to Watch highlights those retailers that have had the largest downward revisions heading into their reports this week.
Relying On Old-Fashioned Stock Picking, Lee Ainslie Reports His “Strongest Quarter” Ever
Lee Ainslie's Maverick Fund USA enjoyed its "strongest quarter in the fund's history" during the three months to the end of June. According to a copy of the firm's second-quarter letter to investors, which ValueWalk has been able to review, Maverick Fund USA gained 18% in the second quarter. Following this performance, the fund was Read More
Macy’s, Inc. (M)
Consumer Discretionary – Multiline Retail | Reports February 23, before the open.
The Estimize consensus calls for EPS of $2.07, with the Estimize Select consensus* even lower at $1.94. This is still above the Wall Street consensus of $1.86, but well below guidance for $2.21. Revenue expectations of $8.822 billion are less optimistic than the Street’s expectation of $8.843B. Compared to Q4 2014, this represents a projected YoY decrease of 20% and 6% for both EPS and sales. The Estimize community has been bearish on Macy’s profitability in the past three months, revising EPS estimates down 23%. That said, the company has consistently delivered positive earnings surprises, beating Wall Street’s EPS estimates 83% of the time.
What to Watch: Despite beating on the bottom line in the third quarter, Macy’s has missed both the Estimize and Wall Street consensus on the top line for 9 consecutive quarters. Failure to stimulate sales performance during the fiscal year led to share prices falling 46.7% in 2015. Comparable store sales have declined the past three quarters with Macy’s cutting its 2015 full year guidance several times from -2% to -3%. This past month, the company announced comparable store sales had fallen 4.7% during the last two months of the fourth quarter. Holiday sales have been crippled by unusually warm weather and competitive threats from the likes of J.C. Penny. Furthermore, international tourist sales have been hampered due to the stronger dollar . In an effort to weather the ongoing struggles, Macy’s plans on closing dozens of stores and eliminating 2000 jobs. The aggressive cost cutting initiative is expected to save the company more than $400 million by 2018. Macy’s has also embraced its off-price business, Macy’s Backstage, to stimulate growth as Nordstrom Rack has done for Nordstrom. That said, the company’s restructuring plan and new initiatives will take multiple years to scale to a level that is impactful to investors. In the meantime, activist investor Starboard Value has urged Macy’s to spin off its stores into assets to unlock the true value of its real estate. It is estimated that the Herald Square location in NYC is valued at $4 billion alone.
Steve Madden (SHOO)
Consumer Discretionary – Textiles, Apparel & Luxury Goods | Reports February 24, before the open.
The Estimize Select consensus is calling for EPS of $0.44, just a penny higher than the Street, and a penny lower than the Estimize mean. Revenues of $345.7M also surpass the sell-side estimate of $344.2M. Since the beginning of the year, EPS estimates have fallen 17%, with revenues declining 5%. The retailer has only beaten the Estimize consensus 43% on the bottom line, but surprisingly surpasses the revenue consensus 71% of the time, going against the broader trend of companies missing on the top line but beating on the bottom line.
What to Watch: This is a company that actually beat expectations in the third quarter, benefiting from the back-to-school shopping season and posting positive earnings growth after four consecutive down quarters. The fourth quarter, however, is expected to suffer from deep discounts and highly promotional events run during the holiday season. Steve Madden, like other shoe retailers, has been suffering from a lack of trends in women’s fashion for the past couple of years, but in many ways has held up better than competition. The company has seen a huge benefit from the strategic acquisitions of Dolce Vita, Blondo and SM Mexico last year. Unseasonably warm weather during the fourth quarter is expected to impact the sales of higher-margin boot sales and other winter apparel.
Consumer Discretionary – Specialty Retail | Reports February 25, before the open.
The Estimize Select consensus is calling for EPS of $0.02, two pennies higher than the Street, and two pennies lower than the Estimize mean of $0.04. Revenues of $637M also surpass the sell-side by $5M. Since the company last reported, EPS estimates have plummeted 75%, with revenues falling roughly 4%. The retailer has only beaten the Estimize consensus 42% on the bottom line, and an even lower 33% on the top line.
What to Watch: The third quarter was a rough one for this retailer, with a big miss on the top and bottom line initiating a further sell-off of the stock, which has fallen 41% in the last 12 months. A preview of how same store sales for the quarter was faring was not encouraging either. As of November, quarter-to-date results were showing a year-over-year decline of 4.8%. This retailer has had a number of product misses in the last few years and currently appears to be going through an identity crisis. Typically known for catering to a mature consumer, Chico’s is looking to revamp and freshen their brand in order to attract a younger demographic, so far these attempts have not been successful. In the fall the retailer made public that it was considering selling itself after being approached by several private equity firms, including Sycamore Partners. This could be good for investors, but thus far no deal has materialized.
Gap Inc. (GPS)
Consumer Discretionary – Specialty Retail | Reports February 25, after the close.
The Estimize community calls for EPS of $0.55 and revenue of $4.19 billion, one penny below the Street on the bottom line, and roughly $18 million lower on the top line. The Esitmize mean is a bit higher on revenues at $4.442B. The Estimize community has maintained a pessimistic stance on the Gap, revising EPS estimates down 17% since the company last reported. Compared to the same period last year, current estimates predict a YoY decline in EPS and revenue of 24% and 4%, respectively. On average, Gap has consistently delivered positive earnings surprises, beating the Estimize consensus 67% of the time, while trumping Wall Street 85% of the time.
What to Watch: This past year has not been kind to the Gap. Declining sales for the past three quarters weighed heavily on the company, with the stock down 41.3% in 2015. This comes as a result of persisting currency headwinds and disappointing performance of its core brands. Consistent with this trend, Gap recently reported a 3% decline in net sales on a constant currency basis and a 5% decline in comparable store sales across its core brands in December 2015. Old Navy, once the savior for this retailer, also posted -7% comp store sales as the brand continues to struggle. Competitive pressure has played a major role in Gap’s soft sales outlook, as fast fashion companies including H&M, Forever21 and Zara have effectively cut into Gap’s already dwindling market share. The retailer operates in a highly fragmented market where it has failed to offer high quality, distinguished products at a competitive price. Moreover, the company is committed to a store growth strategy with a focus on Asia, its Athleta brand and global outlet stores. Unfortunately, these efforts are not expected to mask Gap’s glaring weaknesses when it reports fourth quarter earnings.
J. C. Penney Company, Inc. (JCP)
JCP – Consumer Discretionary – Multiline Retail | Reports February 26, before the open.
The Estimize select consensus calls for EPS of $0.24, three cents lower than the Estimize mean, but a penny above the Wall Street consensus. Revenues of $3.993B are in-line with the Street. The Estimize community has been bearish on JCP profitability this quarter, pushing EPS estimates down 23% in the past 3 months. Historically, the company beats Wall Street 76% of the time while failing to surpass Estimize 44% of the time.
What to Watch: Driven by its strategic initiatives, J.C. Penney delivered a positive earnings surprise in the most recent quarter. The company’s ongoing stance on overhauling its core business has slowly begun to payoff. Between November and December this past year, comp store sales grew 3.9% on the back of strong demand for its private label offerings, higher online sales, and the exploding popularity of its in-store Sephora department. Like other retailers, JCP has focused on improving its online shopping experience and omni-channel reach. The company is also remodeling and renovating its stores with a goal of enhancing high margin departments such as handbags and beauty products. In-store Sephora departments have been a key growth catalyst for JCP, as the strongest performing category since the relationship began in 2006. On the downside, JCP continues to face competitive pressure from all sides, both from other department stores as well as e-commerce retailers. The company also carries a high debt obligation, reporting long term debt over $5.1 billion last quarter and generating negative free cash flow of $3.24 million. Poor finances may be enough to overshadow the company’s recent success when it reports fourth quarter earnings.