Retail week is upon us, the final portion of earnings season which traditionally closes this period of reporting. A variety of big retailers are in the spotlight in the coming week, and most have done surprisingly well this year. The key takeaway will likely be whether these bricks-and-mortar stalwarts can continue proving the “retail is dead” narrative is wrong.
An added bonus for those paying close attention: there could be some interesting opportunities for value investors.
Tuesday, November 19
1. Home Depot: Reports Before Markets Open
Home Depot (NYSE:HD) has been on a roll for the past year. Over the previous twelve months, the home-improvement mega retailer has it outperformed the S&P 500 by 20%. Shares are currently trading at an all-time high of $237.
Over the past two years, comparable-store sales were close to 5%. This metric fell to just 3% last quarter, somewhat worrying investors, especially in light of the reduced full-year outlook given by management. Sales are expected to grow 2.3% this year, considerably lower than the 5-7% we’ve seen in previous years.
Nevertheless, macro conditions look good for Home Depot. House prices are on the rise and consumer spending is strong. These are two critical, positive indicators for Home Depot.
Bullish thesis for the stock: overall, comparable sales hit closer to 5% than to 3%, alleviating some of the concerns investors have, and proving last quarter’s slow growth was only temporary. Home Depot is also very susceptible to trade war tariffs, so any positive update from management regarding lumber prices will send shares higher.
2. TJX Companies: Reports Before Markets Open
Discount retailer TJX Companies (NYSE:TJX) is up 43% this year. It's outperforming the NASDAQ 100 by 12%. A conventional retailer outperforming tech stocks is always noteworthy.
The stock's current performance is due mainly to the fact that TJX’s plunge last year—along with the rest of the market—was unjustified. The Framingham, MA-based company has posted rising TTM revenue for over 60 consecutive quarters. Can you argue with fifteen consecutive years of growth?
Comparable sales are a focal point. Last quarter, comps fell to 2%, versust 5% in Q1. Management expects another soft quarter, with comps between 1 and 2%. Gross profit has been stable at 28% even with lower comps sales. As such, even if this quarter is weaker than expected, there’s no reason to panic. Management is capable and TJX still has opportunities for expansion in the U.S. and abroad.
Bullish thesis for the stock: comparable sales end up at 2% or more and management issues upgraded guidance for the holiday season. The fourth quarter is crucial for TJX. Anything less than record sales will be a disappointment. Guidance for the next quarter is likely to overshadow this quarter’s results, whether good or bad.
Wednesday, November 20
3. Target: Reports Before Markets Open
Target (NYSE:TGT) has executed two successful growth strategies over the past year: remodeling stores to make the shopping experience more enjoyable and at the same time placing an emphasis on its online presence. By doing so, the retailer has managed to continue growing even as the competition grows stiffer.
The key number to watch here is what Target calls “Digital Channel Sales”—that's a fancy way to say e-commerce. Last quarter, digital channel sales grew 34%, contributing 1.8% to the overall 3.4% comparable sales number Target reported. This is impressive, not least because online sales represent only 7.3% of Target’s current business, meaning it has room to grow.
By all appearances, it's taking full advantage of that fact. Target’s operating margin is another critical business metric that's trending in the right direction. Last quarter, Target boosted its operating margin from 6.4% to 7.2%, driven mainly by a reduction in the cost of sales and administrative expenses.
Bullish thesis for the stock: more of the same. As weird as it may sound, e-commerce is becoming a significant component of Target’s growth. Target needs to continue executing its online strategy even as it grow the business on additional, multiple fronts. Improving margins is also a surefire way for shares to continue trading at an all-time high.
Thursday, November 21
4. Macy’s: Reports Before Markets Open
While other retailers adapted to the new world order, Macy’s (NYSE:M), both the store and the stock, seem to be stuck in the early 1990s.
At $16 a share, the department store giant is trading at a price first seen in 1996. The company has experienced many ups and downs over the years, but the new decade low price point of $14, just below its current and slipping position, raises some major concerns.
Going into Q3, Macy’s—by its own admission—is facing its toughest comparable sales number of the year. Last October’s cool temperatures were beneficial for Cincinnati, OH-based organization, but the weather won’t save Macy’s this year. In its last conference call with analysts in August, Macy’s almost begged investors to forgive it in advance for a weak Q3, and promised to make it up to them by following the anemic quarter with a stronger holiday quarter.
Bullish thesis for the stock: Macy’s is already trading at its lowest point in a decade. As a result, its dividend yield is a whopping 9.3%. It also seems to have given up on this quarter; maybe it's just lowballing Wall Street, in order to surprise to the upside. Still, management does expect a strong Q4, so we might see a relief rally at the beginning of 2020.
Friday, November 22
5. Foot Locker: Reports Before Markets Open
Foot Locker (NYSE:FL) has been one of our favorite value stocks for the past three years. That's because Wall Street consistently underestimates the sports apparel and sneaker retailer.
Granted, Foot Locker isn’t in great shape. During the past four quarters, revenue grew twice, but it also shrank twice. Nevertheless, the company is far from dead. Nike (NYSE:NKE) no longer selling its shoes on Amazon (NASDAQ:AMZN) is a positive development for Foot Locker. Consumers not being afraid a recession is on the horizon is another plus for Foot Locker.
Comparable sales last quarter were -0.1%, but that's better than the -0.8% recorded last year for the same quarter. And comps are actually up 1.5% on the year so far, against a disastrous -2% in the first half of 2018.
Anytime something goes mildly wrong with Foot Locker, Wall Street has a tendency to hammer its shares. Foot Locker’s drawdowns are a risk worth considering, but when the stock price is low enough, the value is there.
Bullish thesis for the stock: it's not so much that Foot Locker will resume strong growth, but rather that Wall Street will once again predict doom for a popular retailer that has repeatedly proven its ability to bounce back. Stagnating companies priced as if they were outright failing are legitimate—and potentially profitable—targets for value investors.