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It's Amazon's World, Investors Just Live in It

It's Amazon's World, Investors Just Live in It
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Thursday, 24 May 2018 09:09 AM Current | Bio | Archive

Retail: Revival or Dead Cat Bounce? As the year progresses, the gap between ytd winners and losers grows wider, with the S&P 500 Technology sector up 9.7% and the S&P 500 Consumer Staples sector down 13.5%.

Here’s where the remaining S&P 500 sectors stand in between those two extremes ytd through Tuesday’s close: Tech (9.7%), Energy (7.2), Consumer Discretionary (6.3), S&P 500 (1.9), Financials (1.2), Health Care (0.4), Industrials (-0.7), Materials (-1.5), Utilities (-6.7), Real Estate (-6.7), Telecom Services (-11.4), and Consumer Staples (-13.5) (Fig. 1).

Given the strength in the job market, it’s not surprising that the S&P 500 Consumer Discretionary sector is near the top of the leaderboard. The sector also has the good fortune to include the Internet & Direct Marketing Retail industry, which includes Amazon and Netflix. It’s up 37.1% ytd, making it the best-performing of the industries we track (Fig. 2).

A bit more surprising, given the prevailing narrative that Amazon is eating everyone’s lunch, is the strength of the S&P 500 Department Stores industry, which is up 14.8% ytd after being in a downward trend for most of 2015 through 2017 (Fig. 3). Granted, the industry contains some of the better department stores: Kohl’s (up 11.8% ytd), Macy’s (up 31.5% ytd), and Nordstrom (down 3.4% ytd). Conversely, it lacks some of the industry’s clunkers like JC Penny (down 25.6%), Sears (down 5.6%) and Bon-Ton, which is liquidating.

In recent days, Kohl’s, Macy’s, and TJX reported earnings. Let’s take a look at what they’re seeing in the market to determine whether this retail rally has legs:

(1) Thanks, Mom. Kohl’s Q1 results were above expectations, helped by promotions leading into Mother’s Day. However, the company didn’t increase full-year targets as much as investors might have liked, so the retailer’s shares dropped 7.4% after the earnings release, dragging down its stellar one-year share price appreciation to roughly 60%. Kohl’s Q1 same-store sales increased 3.6%, but the company maintained its target of zero to 2% for the full year.

In the 3/15 Morning Briefing, we highlighted some of the innovative things Kohl’s has done to keep customers coming through its doors in the Age of Amazon. One of those changes has been encouraging customers to buy online and pick up purchases in the store. More customers doing so contributed to better-than-expected Q1 shipping costs, management said. Kohl’s fulfilled about 30% of its digital units in the store during the quarter, up from about 25% last year. The company announced its intention to expand the number of items that can be ordered online and picked up in the store.

Our 3/15 discussion also focused on Kohl’s emphasis on the growing active wear segment; that segment delivered 10% same-store sales growth in Q1. The company added Under Armour to its stores more than a year ago, and the company plans to test expanding the active wear department in 30 stores in August.

Finally, in a sign that retailers are circling the toy business left behind by the now-bankrupt Toys R Us, Kohl’s will begin offering Lego and FAO Schwarz brands in September.

(2) A mixed bag. Last week, Macy’s surprised investors with stronger-than-expected Q1 results, but Nordstrom and JC Penney’s weren’t as fortunate. Macy’s same-store sales rose 3.9% in the quarter, and the retailer boosted its full-year EPS estimate by 20 cents to $3.75-$3.95 a share.

The results benefited from a promotion that was in this year’s Q1 but last year’s Q2. Macy’s also credited “a streamlined merchandising structure and a new incentive plan that lets all full- and part-time staff share in the gains, based on local store and corporate performance,” a 5/16 WSJ article reported. Macy’s Q1 results were also boosted by the opening of 20 new Backstage stores, a new discount store concept Macy’s has been rolling out.

Meanwhile at Nordstrom, same-store sales improved by only 0.6%. At JC Penney, they rose just 0.2%, and the company’s CEO defected for Lowe’s. Sears—which recently announced its intentions to try to sell its Kenmore brand and other assets—reports results today.

(3) Attention, bargain shoppers. Off-price retailer TJX has proved once again that shoppers can’t turn down a sale. Its Q1 same-store sales jumped 3.0%, above expectations for a 2.5% gain. That result is even more impressive because the company doesn’t include its online sales in the calculation while many competitors do.

TJX did warn investors that it expects to incur higher freight costs, higher fuel surcharges, and higher wages and costs from restructuring its global IT department. Its pre-tax profit margin could come in at 10.7%-10.8% this year, down from 11.2% last year.

But overall, TJX was able to raise its full-year profit forecast to $4.04-$4.10 a share, up from the company’s earlier call for EPS of $4.00-$4.08. The shares gained a bit more than 3% on the earnings news Tuesday and are up roughly 14% ytd.

(4) By the numbers. The S&P 500 Department Store industry is expected to grow 2018 revenue by 0.6% y/y and earnings by 11.0% (Fig. 4 and Fig. 5). However, earnings in 2019 are expected to drop 2.7%. The industry’s forward P/E is 11.2, well below the S&P 500’s multiple and at the low end for the industry over the past 20 years (Fig. 6). Only those with new ways to entice customers through the doors may have found the winning formula to survive in the Age of Amazon.

Technology: Advantage Facebook. Just in case anyone is keeping score, it’s Facebook 2 – Regulators 0. The company enjoyed its latest victory on Tuesday when CEO Mark Zuckerberg testified in front of a group of European Parliament leaders. Let’s take a look at the latest events in the Facebook drama and EU data wars:

(1) Favorable format. The format used for the EU session was entirely in Zuckerberg’s favor. The EU lawmakers stated their questions at the beginning of the session, then allowed Zuckerberg to categorize them and decide which groups of concerns he’d address—and which ones he’d ignore.

When the session ended without many of the lawmakers’ specific questions answered, they seemed less than pleased and requested Facebook submit written responses to their questions. But written responses don’t make for good television, nor do they lend themselves to follow-up questions.

To their credit, many of the EU lawmakers’ questions were tough. Zuckerberg opted not to explain why the EU shouldn’t break up the Facebook monopoly. Nor did Zuckerberg say whether Facebook could prevent bullying. He declined to address whether data from different Facebook divisions were comingled. While EU lawmakers sounded more knowledgeable than their counterparts in the US Congress, they didn’t get much farther.

(2) GDPR on the way. Zuckerberg’s testimony was timely because on Friday the EU’s General Data Protection Regulation (GDPR) goes into effect. GDPR is basically the EU’s new data privacy law. It addresses many areas of data handling, but most importantly it forces companies to get consumers to opt in before sharing their data, instead of assuming it’s fine to access the data.

Zuckerberg said Facebook was prepared to comply with the GDPR. However, he failed to mention that consumers in Europe were being given only take-it-or-leave-it options. If users don’t accept Facebook’s data policies, deleting their Facebook account is the only alternative. To many people, that equates to having no option but to accept Facebook’s data policies.

“Facebook says the data it collects is necessary to fulfill its contract with users to provide ‘a personalized experience.’ The company says it offers prominent options to control how that data is used, but that as a data-driven business, it needs to collect information about its users to function,” a 5/11 WSJ article reported. Stephen Deadman, Facebook’s global deputy chief privacy officer told the paper: “There are certain elements of the service which are core to providing it and which people can’t opt out of entirely, like ads … There’s no point in buying a car and then saying you want it without the wheels. You can choose different kinds of wheels, but you need wheels.”

(3) Market likes what it sees. The stock market is clearly indicating that Facebook is ahead in the data wars. The company’s shares fell from $185.09 before the Cambridge Analytica scandal broke down to $152.22. In the ensuing weeks, the shares have rebounded, and closed Tuesday at $183.80. Ytd, Facebook shares are up 4.2%, outpacing the S&P 500’s 1.9% gain. And over the past year, Facebook shares have climbed 24.0% while the S&P 500 has only added 13.8%.

(4) By the numbers. Facebook is a member of the S&P 500 Internet Software & Services stock price index, which has climbed 3.1% ytd (Fig. 7). The index includes highfliers Akamai Technologies and VeriSign, up 17.5% and 11.7% respectively ytd. But it also includes laggards Google, up 2.2% ytd, and Ebay, which is flat on the year, 0.1%.

The industry’s revenue is expected to grow 26.3% this year, and its profits are estimated by analysts to increase by 30.8% (Fig. 8 and Fig. 9). The industry’s forward P/E has dropped to 22.7, down from 27.4 during June 2017, but at a reasonable level given how quickly earnings are growing (Fig. 10).

Dr. Ed Yardeni is the President of Yardeni Research, Inc., a provider of independent global investment strategy research.

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EdwardYardeni
Given the strength in the job market, it’s not surprising that the S&P 500 Consumer Discretionary sector is near the top of the leaderboard. The sector also has the good fortune to include the Internet & Direct Marketing Retail industry, which includes Amazon and Netflix.
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2018-09-24
Thursday, 24 May 2018 09:09 AM
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