Monday, January 21, 2008

In The Spotlight: Downturn of Retail Equity


With drops of virtually every retail sector due to post-black Friday woes and disappointing December sales, a buy and hold strategy would have been quite futile going into this New Year. Drops in equities like Saks (NYSE:SKS), J Crew (NYSE:JCG), Lululemon (NASDAQ:LULU), Nordstrom (NYSE:JWN), GAP (NYSE:GPS), Tiffany (NYSE:TIF), Coach (NYSE:COH), Abercrombie (NYSE:ANF), and a continuation of Ralph Lauren's (NYSE:RL) decline have been quite severe, however it is safe to assume that there are a few economic factors which could play into a further downturn. Yes, holiday sales ended up weaker than expected by many analysts, but the momentum seems to be continuing for the time being. A recent opinion in the Wall Street Journal has some good insight into retail's worst streak in 17 years:

"Chains are slamming the brakes on store openings, cutting back on inventory and girding for leaner times as consumer spending chills. The speed with which sales slowed during the holidays caught even cautious retailers off-guard, prompting a flurry of profit warnings.

And while data on December consumer spending won't be released until the end of the month, plummeting sales suggest consumers are snapping shut their pocketbooks." Full Text (Subscription)

In terms of cutting losses, there might be some value in hedging losses by shorting retailers who have no international exposure and also have fundamentally horrible collections and business strategies.

Be excited for the buying opportunities further in the future. There is a very good chance these equities will be priced at a significant discount once the momentum of this downturn begins to rebalance into the positive. For now, we suggest reweighing positions to the short side or looking for special event-driven momentum in earnings announcements.

Equities we like (longer-term):
JCG, JWN, VFC

Equities we like to short:
COH, GPS, ZUMZ

1 comment:

Scott-O-Bot said...

I am convinced that successful capital market speculation requires more art than science. I think it was Benjamin Graham who introduced the concept of "margin of safety" in stock speculation.

I agree, there may be long entry points in the semi-near future that provide a favorable margin of safety to the speculator. On the other hand, I am slightly weary of the american consumer's ability to continue buying at the rates observed in the past. With the unemployment rate set to increase and the purchasing power of the American dollar decreasing over the longer term American retailers could face an increasingly difficult operating environment.

Underlying conditions