Are Retailers Lowballing Expectations to Look Better Later?
"A number of economic pressures, including gas prices and ongoing concerns about unemployment, continue to affect key segments of retail," said Mike Duke, CEO of Wal-Mart Stores. (WMT). The world's largest retailer posted 10% earnings growth in the first quarter, but management had a gloomy outlook for the rest of the year.
Both Lowe's (LOW) and Home Depot (HD) used the same "year of transition" phrase to describe 2010. Both had good quarters, both said consumers are spending on their homes again -- and both said they don't expect the second half to be any great shakes.
Of course, the housing crisis is still hammering the hardware big-box chains. But Wal-Mart? Just as they did during the first week of retail earnings reports, merchants appear to be trying to talk down investors' expectations.
Not Really Expecting a Double Dip
"Lurking below the surface is a concern that the economic recovery will be short-lived, something the data points do not support," said Credit Suisse retail analyst Gary Balter. In a report raising his earnings targets for Home Depot, he noted that the economy is showing improvement in both housing and employment, and that interest rates remain low. Retailers are worried that both comparable sales and earnings growth will appear to slow down in the second half and that their stocks will look overpriced, he wrote.
While the retailers keep invoking the specter of an iffy recovery in their forecasts, they're not really expecting a double-dip back into recession. It's more likely that what's haunting them are operational issues and tough comparisons to the few unexpectedly profitable quarters they pulled off last year, thanks to inventory reductions and cost-cutting.
"Some of them are being coy, some of them just don't know if the momentum is going to continue and some of them had far better back halves than front halves last year," says Sam Poser, analyst at Sterne Agee. "The other ones have to look internally at how they're operating."
Wall Street "fell in love with low inventories and how that affects margins," says Brian Sozzi, retail analyst at Wall Street Strategies. But now, as the prices of materials and labor in Asia go up and retailers rebuild tapped-out stock, costs will have to rise. So the merchants are being careful not to overpromise and make the second half look disappointing by comparison, he says.
Consumers' Complaint: Few Salespeople
That dynamic showed itself last week, when early reports triggered a retail sell-off, despite good results and guidance increases across the board. Investors punished merchants for not raising their earnings forecasts more.
After all, nearly every measure of consumer intentions shows Americans are in a shopping mood this year. A survey from consultants Deloitte found 63% of shoppers plan to spend the same or more in 2010 than they did in 2009. But in a sign to retailers, they also complained that stores have less sales help (53%) and less inventory (43%) than before the recession, so maybe retailers do need to worry about rising expenses during the second half.
"If you continue to see this sell-off, you may want to get constructive," buying some retail stocks, says Sozzi. "You may be able to pick up some winners in back-to-school and holiday."
He favors Target (TGT), saying it still has potential to show more sales growth as it remodels stores, and it's trading at a discount relative to rival Wal-Mart, which he also recommends as a buy.
The weak recovery is way for some companies to screen their inability to get ahead of changes in the economy, while others do quite well at it, says Poser. He mentions Nordstrom (JWN) and Shoe Carnival (SCVL) as retailers that have managed well.
"How weak is the consumer?" Posner asks. "Or are they doing a better job of knowing their consumers and capturing their imagination?"