Dismal Top-Line Considering Favorable Weather Comparison – February Could Be Ugly

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Big picture, comp sales in January 2012 should have been stronger. Why?

In January 2011, retailers unanimously suggested comp sales were negatively impacted by inclement weather (see comments below). Retailers should have received a nice lift in January 2012 due to the relative lack of store closures, etc. A retailer would prefer a warm winter (this year) versus a material number of store closures (last year).

It was a different story in February 2011. Sales in February 2011 rebounded as winter weather ‘normalized’ versus the prior month.

So, if retailers were unable to report stronger top-line results in January 2012 with a favorable weather comparison, what happens in February 2012 when the sector laps a good weather month?

Today, no one mentioned last year’s inclement weather. Let’s review some of the disclosures from retailers reporting monthly sales:

A couple retailers suggested that delayed tax refunds negatively impacted sales in January 2012 (e.g. CATO, CTRN).

The problem is that, in January 2011, many more retailers complained about delayed tax refund anticipation loans versus the prior year (e.g. BIG, BONT, CTRN, and FRED). Therefore, it’s difficult to believe that delayed tax refunds negatively impacted sales (relative to LY) as much as CATO and CTRN are suggesting.

In January 2012, retailers generally reported comp sales results that were -100 Bps to -300 Bps below December 2011 (see attached table).

Therefore, keep an eye on retailers that reported comp sales in January 2012 that were greater than -300 Bps below December 2011 (CATO, DDS, JWN, M, ROST, SMRT, and WTSLA).

Five retailers that report monthly sales numbers have negative 2-year ‘stacks’ in January 2012. These are: GPS (-1.0%), BONT (-3.2%), SMRT (-5.1%), WTSLA (-6.8%), and CATO (-10.0%). See attached table.

4-year comp sales ‘stacks’ range from +30.0% at LTD to -25.2% at WTSLA. See attached table.

Furniture continues to be mentioned as a relatively strong category, continuing the trend that has been reported over the past few months. Clearly, the category has been the worst performer over the past 5 years and the resurgence may have more to do with “replenishment” than anything else. But, an encouraging trend nonetheless.

COST suggests that weaker foreign currencies negatively impacted total company comp sales by -75 Bps in January 2012. This compares to -50 Bps in December 2011, -50 Bps in November 2011, and -25 Bps in October 2011.

Keep an eye on retailers with FX exposure.

COST suggests that Food/Sundry inflation was +LSD to +MSD in January 2012 versus +MSD in December 2011, +LSD to +MSD in November 2011, and +LSD in October 2011. Interestingly, Food/Sundry inflation at COST in January 2011 was disclosed as “a little over” +100 Bps.

In addition, COST disclosed that its Fresh Foods inflation was +LSD to +MSD in January 2012 versus +MSD in December 2011. In January 2011, Fresh Foods category inflation was disclosed as +LSD. When will runaway food inflation end?

While the lowered EPS guidance revision for Q4 2011 at ANF did not surprise us, the company is likely being too optimistic re: FY 2012 ($3.50 to $3.75 guidance range). We’re well below $3.00 for next year.

ANN management AGAIN proves that it cannot forecast its GPM%. The company has ‘missed’ its quarterly GPM% guidance in 4 of the past 5 fiscal quarters.

Last month, JWN management suggested that The Rack’s relatively poor performance versus LY was a function of a GroupOn event in the prior year. What was this month’s excuse? We’re continuing to forecast an EPS ‘miss’ versus consensus expectations in Q4 2011.

Looking Ahead by Looking Back… What happened in February 2011?

Overall, comp sales in February 2011 were strong following a weather impacted January 2011.

While a few retailers attempted to suggest that weather negatively impacted sales in February, a a couple of retailers mentioned that weather trends became much more favorable in the latter half of the month.

In February 2011, the strongest category performance was in food (inflation), men’s apparel, jewelry, and shoes. Weak categories included electronics.

In February 2011, week #4 was generally considered to be the strongest fiscal week from a comp sales perspective. Week #1 was generally held to be the weakest fiscal week in February 2011.

In February 2011, the Northeast and Mid-Atlantic were generally held to be the strongest comp sales regions. The Midwest was generally held to be the weakest comp sales region in February 2011.

Strong Top-Line – Yet, Sales Ex-Week #4 & Weak Margins Leave Much to be Desired

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The theme for today is the large-scale downward EPS revisions. Do we need further proof that management teams are sometimes the worst forecasters of forward earnings? Companies materially lowering their EPS guidance today include: AEO, BONT, JCP, KSS, PLCE, and TGT.

How much of today’s materially lower EPS guidance relates to the earlier store openings on Black Friday (i.e. payroll de-leverage)?

More than a few retailers are trying to blame unseasonably warm weather on their relatively weak top-line results in December 2011. Yet, let’s not forget that retailers generally blamed snowstorms on post-Christmas weakness a year ago.

Don’t believe the hype. Fiscal week #4 in December 2011 alone saved the sector. If the relatively dismal sales trend for other four weeks of the month carries over into January 2012, look for a sharp sales deceleration in the coming months.

The fact is that the retail industry received a material top-line boost via an optimal fiscal calendar in December 2011 (Christmas Eve landed on a Saturday this year). Week #4’s relative strength has nothing to do with guests waiting “to shop for last-minute gifts” as TGT suggested today.

A few retailers are patting themselves on the back for strong sales the week leading up to Christmas. Yet, fiscal week #4 in December 2011 benefitted from an advantageous calendar this year.

Therefore, retailers attempting to thump their chest for strong sales the week prior to Christmas (e.g. JCP, TGT, and WTSLA) either (1) don’t understand retail fiscal calendar dynamics, or (2) believe that savvy institutional investors that actively follow the sector are not smart enough to see through this particular red herring.

In December 2011, retailers generally reported comp sales results that were +200 Bps to +400 Bps above November 2011. Again, the optimal fiscal calendar played a large part in this outcome. There was a similar result the last time the sector experienced an optimal fiscal calendar (December 2005).

Therefore, keep an eye on retailers that reported worse comp sales in December 2011 versus November 2011 (e.g. FRED, SKS, SMRT, TGT, and WTSLA).

Six retailers that report monthly sales numbers have negative 2-year ‘stacks’ in December 2011. These are: FRED(-0.2%), BONT (-0.6%), CATO (-1.0%), SMRT (-1.9%), WTSLA (-5.8%), and GPS (-6.0%). See attached table.

COST reported that its Majors category produced +LSD to +MSD comp sales results in November 2011 versus LY. Yet, in December 2011, the Majors category delivered –HSD comp sales. Yikes!

In December 2011, TV dollars were –Double Digits. Last month, COST bragged about its higher ASP’s enabling the category to deliver +HSD comps. What a dramatic reversal. Additional concerns for investors in BBY?

COST suggests that weaker foreign currencies negatively impacted total company comp sales by -50 Bps. This compares to a -50 Bps in November 2011 and -25 Bps in October 2011.

Keep an eye on retailers with FX exposure.

COST suggests that Food/Sundry inflation was +MSD in December 2011 versus +LSD to +MSD in November 2011 and +LSD in October 2011. Interestingly, Food/Sundry inflation at COST in December 2010 was disclosed as +100 Bps to +200 Bps.

In addition, COST disclosed that its Fresh Foods inflation was +MSD in December 2011 versus a similar +MSD result a year ago. When will runaway food inflation end?

Gosh, so many (erroneously) jumped on the AEO bandwagon of late. Today’s downward EPS guidance revision implies material merchandise margin degradation. This sales release continues to reinforce how competitive the teen space is today and is a precursor to another EPS ‘miss’ in Q4 2011 that we’re forecasting at ANF.

GPS again reported dismal comp sales results. Yet, CEO Glenn Murphy suggests that the company is “clear and focused on what needs to be fixed in order to improve” the sales trend in FY 2012.

How many times has Mr. Murphy made this proclamation? How many times can you cry wolf?

PLCE issues dramatically lower EPS guidance for Q4 2011. Yet, PLCE management places much of the blame on unseasonably warm weather.

But, you have to chuckle when the company suggests that there has been a “positive consumer response” to the Spring 2012 product line. Note to PLCE management. When you dramatically markdown the product, you’ll generally see a “positive consumer response.”

Looking Ahead by Looking Back… What happened in January 2011?

Overall, comp sales in January 2011 were -100 Bps to -200 Bps less than December 2010. Generally, traffic levels were strong. Yet, average unit retail (AUR) results were weak (implied merchandise margin degradation).

Retailers targeting a lower-end consumer reported relatively weaker sales results. Interestingly, a few lower-end retailers (e.g. BIG, CTRN, FRED) complained about the later timing of tax refunds and the inability of their customer to get refund anticipation loans.

In January 2011, the strongest category performance was in food (inflation), men’s apparel, jewelry, and shoes. Weak categories included electronics.

In January 2011, weeks #1 and #4 were generally considered to be the strongest fiscal weeks from a comp sales perspective. Week #2 was generally held to be the weakest fiscal week in January 2011.

In January 2011, the South and West were generally held to be the strongest comp sales regions. The Northeast was generally held to be the weakest comp sales region in January 2011.

Black Friday weekend sales were strong across the board (ex-JCP). This is a continuation of a trend that began 7-8 years ago (Black Friday’s importance continues to increase). Yet, we suspect that strong post-Black Friday weekend sales will again fall off a cliff (also a trend that began 7-8 years ago).

In November 2011, retailers generally reported comp sales results that were within -100 Bps to +100 Bps versus October 2011. But, there were more outliers this month. For example, comp sales for SKS were +750 Bps greater in November 2011 versus October 2011. Conversely, comp sales for KSS were -1,010 Bps less in November 2011 versus October 2011.

Generally, 2-year comp sales ‘stacks’ improved in November 2011 versus October 2011.

Three retailers that report monthly sales numbers have negative 2-year ‘stacks’ in November 2011. These are: KSS (-0.1%), BONT (-2.0%), and SMRT (-4.6%). CATO and GPS have flat 2-year stacks. See attached table.

A couple retailers complained about unseasonably warm weather in November 2011 negatively impacting the comparison versus LY: BONT and TJX. TJX suggested on its monthly sales recording that November 2011 was one of the “warmest on record.”

It’s worth mentioning that November 2010 greatly benefitted from weak outerwear sales in October 2010 and the return to more seasonable weather relative to the prior month.

COST reported that its Majors category produced +LSD to +MSD comp sales results in November 2011 versus LY. While TV units were down –MSD, ASP’s were higher driven by technology and customers “buying larger screen sizes” this year versus LY. November 2011’s comp results compare to –HSD in October 2011.

COST suggests that weaker Canadian Dollar and Mexican Peso negatively impacted total company comp sales by -50 Bps. This compares to a -25 Bps year-over-year impact in October 2011.

COST suggests that Food/Sundry inflation was +LSD to +MSD in November 2011 versus only +LSD in October 2011. Interestingly, Food/Sundry inflation at COST in November 2010 was disclosed as +LSD. When will it end?

Small appliances, electrics, and housewares continue to be specifically mentioned as stronger relative categories (e.g. COST, KSS, and TGT). KSS suggests that its year-to-date electrics category sales are +10% versus LY.

JCP discloses that its comp sales were positive prior to the Thanksgiving weekend. But, the company suggests that its decision to stick to its 4:00am open time on Black Friday negatively impacted sales over this key weekend. JCP was the only retailer to suggest a relatively weak Black Friday weekend.

Internet sales at JCP continue to be weak (-6.9% in November 2011 versus LY). Yet, the company suggests that Black Friday weekend and Cyber Monday Internet sales improved. To what, -3%? Good grief.

JCP’s gap between total sales growth and comp sales growth widened to -390 Bps in November 2011 (i.e. -2.0% comp sales and -5.9% total revenue). Yet, the company’s quarterly earnings guidance suggested only a -250 Bps to -300 Bps gap. What happened?

Abysmal top-line performance at KSS. It’s amazing to see such a weak top-line result when the company joined its peers in opening much earlier. Store payroll, while challenged across the board due to earlier openings, may have greatly de-leveraged at KSS.

While it’s worth noting that KSS management indicated comp sales in November 2011 would lag to overall quarterly result, KSS management historically has a poor track record when predicting the monthly comp sales cadence.

LTD reported that its Victoria’s Secret chain delivered merchandise margins in November 2011 that were “significantly below” last year. While merchandise margins likely suffered in November 2011 versus LY, LTD was the only retailer specifically mentioning a decline versus LY.

M reported Internet sales growth of +49.6% in November 2011 versus +31.8% in November 2010 and +22.6% in November 2009. Wow!

PIR continues to report impressive merchandise margin gains.

Looking Ahead by Looking Back… What happened in December 2010?

Overall, comp sales in December 2010 were strong. But, once again, a strong Black Friday weekend did not carry over into the month of December. Most retailers reported comp sales in December 2010 that were -200 Bps to -300 Bps less than November 2010.

A snowstorm in the Northeast negatively impacted traffic on the day after Christmas.

In November 2010, the strongest category performance was in food, men’s apparel, and shoes. Weak categories included electronics and home.

In December 2010, week #5 was generally considered to be the strongest fiscal week from a comp sales perspective. Weeks #2 and #3 were generally held to be the weakest fiscal weeks in December 2010.

In December 2010, the South was generally held to be the strongest comp store sales region. There was no consensus as to the weakest comp store sales region in December 2010.

Quick thoughts from this morning’s monthly sales releases:

Don’t buy the unseasonable weather excuse. Last year, the following monthly reporting retailers complained about unseasonable weather in October 2010: BONT, DEST, JCP, KSS, M, SMRT, SSI, TGT, and TJX.

This year, M claimed that “sales of cold-weather products such as coats, hats, and sweaters were soft for most of October as the weather stayed unseasonable warm, but they began to normalize once temperatures turned cooler.”

Last year, M claimed that “we experienced some softness in sales early in October given the unseasonably warm weather.”

The fact is that there was likely no “year-over-year” impact on cold weather product sales via weather in October 2011.

In October 2011, most retailers reported a dramatic decline in their 2-year comp sales ‘stack.’ Bucking this trend with a stronger 2-year comp sales ‘stack’ in October 2011 versus September 2011 were DDS, FRED, GPS (gasp!), and ROST.

For the most part, sales are relatively strong across the board. The top-line has not been a problem as retailers have clearly increased pricing over the past few months. But, the elephant in the room is the material merchandise margin declines that many retailers will report in 2H 2011. For example, while sales are strong at LTD, the company just reported its 3rd consecutive month of merchandise margin declines versus LY (per monthly sales recording).

Last month, COST reported that its Majors category (i.e. electronics) delivered a +LSD sales gain versus the prior year. This was a fairly dramatic reversal of the recent trend. This month, COST reports a –HSD sales decline in its Majors category.

Wednesday after the close, AEO reported relatively strong sales for Q3 2011.

Here’s the problem. It’s likely that GPM% dramatically declined in Q3 2011 versus LY. Our model implies a -400 Bps GPM% decline versus LY. Therefore, we’re not inclined to believe that AEO has much EPS upside versus today’s consensus expectations in Q4 2011 or FY 2012.

Also, let’s not get too excited about the company’s “positive customer response to the initial holiday assortment” in early-November 2011. Week #1 of fiscal November 2010 was the weakest comp sales week a year ago.

Uh, oh! ANF reports that its flagship stores in Europe have turned negative. Not a good sign for folks that wanted to believe in the international story. Here in the U.S., it’s clear that the company ‘bought’ their “acceleration in the trend” in Q3 2011.

A flat average unit retail (AUR) in Q3 2011 in the face of massive product cost pressures portends a dramatic GPM% decline versus LY.

This is going to get ugly. We were at $4.04 in FY 2012 (guidance $4.75) and we now believe that our conservative EPS estimate is in jeopardy.

We came into today thinking $1.69 was a reasonable expectation for FY 2012 at ARO (consensus $0.99). Today, we’re probably moving closer to $2.00.

Does anyone else notice that JCP has recently reported a stronger top-line trend during the last week of the fiscal month? Similar to August/September 2011, sales were stronger the final week of fiscal October 2011 than the prior weeks of the month. Hmmm. It’s likely that the company has recently pulled the markdown lever at the end of the month to jumpstart sales at the expense of merchandise margin.

Looking Ahead by Looking Back… What happened in November 2010?

Overall, comp store sales in November 2010 were strong. Retailers had excess inventory and received a top-line benefit via cool weather in the month following a balmy October 2010.

In November 2010, the strongest category performance was in food, outerwear, men’s apparel, and shoes. Weak categories included televisions and computers.

In November 2010, weeks #2 and #3 were generally considered to be the strongest fiscal weeks from a comp sales perspective. Week #1 was generally held to be the weakest fiscal week in November 2010.

In November 2010, the South was generally held to be the strongest comp store sales region. The West was generally held to be the weakest comp store sales region in November 2010.

Quick thoughts from this morning’s monthly sales releases:

Big picture, sales are strong as many retailers are beating their quarterly comp sales guidance. Most retailers reported comp sales results for September 2011 that were +100 Bps to +200 Bps stronger than August 2011. But, merchandise margins are clearly declining in Q3 2011 versus the prior year as only a couple retailers raised their quarterly EPS expectations.

Keep an eye on the latter half of October 2011. Sales in October 2010 were materially stronger in the second half of the month than the first half of the month (via weather). Strong (relative) sales today have the potential to reverse course later in the month.

Of the monthly sales reporters, the following retailers have not ‘missed’ the consensus comp sales estimate this year: COST, JWN, M, and ROST. We define a ‘miss’ as -50 Bps versus the consensus comp sales estimate. Of this group, COST last ‘missed’ in November 2009 and JWN last ‘missed’ in May 2010.

COST disclosed that its Food/Sundry and Fresh Food inflation versus LY was running in the +LSD to +MSD range. Interestingly, this represents largely no change versus the inflation disclosures the company made 2 months ago.

Did anyone notice that comp sales in the Majors category (i.e. electronics) at COST were +MSD in September 2011 versus LY? This is the first time in the past 1-2 years that we believe the company has suggested a positive comp for Majors. Is it time to take a chance on BBY?

That said, it’s worth noting that TGT continues to suggest that its Electronics category was an underperforming category in September 2011 versus LY (worst relative performer in the company’s Hardlines group).

FRED can always be counted on for the most clever of top-line excuses. In September 2011, the company suggests that sales shifted to October 2011 via the “timing of Social Security payments.” Ridiculous.

GPS again reported the worst comp sales result in September 2011 amongst those retailers reporting monthly comp sales. Comically, CEO Glenn Murphy suggests that “there were some bright spots across our brands and business units.” Good grief.

Also, the company’s International Division reported a dismal -13% comp sales result in the month. The company’s only viable growth opportunity is materially underperforming its peers.

JCP guides Q3 2011 lower than its original range. No real surprise here. But, interestingly, the company will have to deliver comps of +3.0% or greater in October 2011 to achieve its flat comp sales guidance for Q3 2011. While sales in September 2011 “improved throughout the month,” a +3% comp sales expectation for the current month may be a stretch.

Looking ahead, the real doozy comes when the company provides EPS guidance for Q4 2011. We’re well below the consensus in Q4 2011.

Finally, it’s worth noting that the company did not provide any sales metrics on its monthly sales recording today. Hmmm.

On its monthly sales press release, KSS explicitly suggests that the JLo and Marc Anthony launches “generated excitement which resulted in improved customer traffic.” Yet, on the company’s monthly sales recording, women’s apparel performed in-line with the company average and children’s and men’s apparel were suggested as the strongest performing categories.

Keep an eye on ROST. Today’s upward EPS guidance revision was pretty much expected. And, yes, they’ll raise their EPS guidance again next month.

But, when excluding a shrink pick-up, the company’s EBIT margin in Q3 2011 is likely only flattish than LY (or, possibly lower). We’re still forecasting a fairly sizeable EPS shortfall versus consensus in Q4 2011.

Strong sales at TGT. We continue to expect a fairly large EPS ‘beat’ in Q3 2011.

Despite stronger than expected sales, TJX suggests that “volatile” FX rates are one reason for maintaining its current EPS guidance range.

ZUMZ raised its Q3 2011 EPS guidance. But, ZUMZ was again the only retailer to explicitly suggest that transactions were lower than LY. In addition, the company’s new guidance range for Q3 2011 implies a material merchandise margin decline versus LY. While early, we’re forecasting another dramatic lowering of EPS expectations for Q4 2011.

Looking Ahead by Looking Back… What happened in October 2010?

Overall, comp store sales in October 2010 were a disappointment as most retailers reporting monthly sales missed consensus expectations. Sales the first two weeks of the fiscal month were negatively impacted by weather. Sales rebounded in the latter half of the month.

In October 2010, the strongest category performance was in men’s apparel, jewelry, shoes, and Junior apparel. Weak categories included outerwear, sweaters, and electronics.

In October 2010, weeks #3 and #4 were generally considered to be the strongest fiscal weeks. Week #2 was generally held to be the weakest fiscal week in October 2010.

In October 2010, the Northeast and West were generally held to be the strongest comp store sales regions. The Midwest was generally held to be the weakest comp store sales region in October 2010.