January 9, 2017

Amazon a threat to traditional store based retailers

For apparel-centric (department store) retailers, the news releases issued after Wednesday's close by Macy's (M) and Kohl's (KSS) suggest a disappointing holiday season, with comps falling 1% to 2% below plan. (Real Money technical analyst Bruce Kamich also took a look at Macy's and Kohl's this morning and analyzes what may lie ahead for both names.)

The retail apparel group in general and M and KSS in particular are down meaningfully in price after both retailers lowered guidance.

- Most of the weakness apparently was in November, especially before the election. Thanks to Rule FD, this data is not released on a timely basis.
- Stock charts of VF Corp. (VFC) and PVH had suggested weakness in apparel, although Macy's suggested handbags and watches in its release. This would be the second year in a row of poor apparel sales. (Some reversion to the mean should be expected in the quarter ahead).
- The consumer's economic situation remains quite strong. The first quarter will be helped by a late Easter.

Macy's also announced yesterday a restructuring in recognition of being "over-stored." It is closing 100 stores; it has identified 68 of them that will shut their doors. I sense most of the comp shortfall at the retailer was in stores that will be closed. In a trip I recently made to soon-to-be-shuttered Macy's CityPlace store in West Palm Beach, the stores clearly were not replenished in a timely manner and I had heard that many of the associates knew something was up. A lot of the problems here should not recur next year and the company remains financially strong. I do not expect a cut in the dividend. Macy's also noted that its large online business grew more than 10%.

Amazon (AMZN) remains a significant problem for any store-based retailer. Several speakers at the Citi TMT Conference noted AMZN is a threat to everyone as the company has no constraints on his strategy and does not need to deliver good quarterly earnings. AMZN clearly wreaked havoc with apparel merchants this holiday, but it is not going to get all the business. 

At some point the share gains of Amazon and its peers will be discounted in retail share prices. We could be approaching that point sooner than later as the taste of buying after Wednesday's disappointments will be so sour as to dampen most investors' appetites. Moreover, who doesn't recognize by now the threats to traditional brick-and- mortar retailers? It is now universally assumed, so buying at the sound of trumpets could soon make sense.

These firms are not going away and, though I won't be participating; deep-value buyers -- and maybe even some activist investors -- will have a field day with retail merchandise "going on sale."

The issue, of course, is how long and how deep that sale will go on!

Two additional comments:
-    The aforementioned problems may have limited impact on my only long in the space, JC Penney (JCP) , which is trading below $8.00 this morning. The JCP stores I recently have visited look fresh and clean, the appliance initiative is gaining traction and the sale of the corporate headquarters will strengthen the company's financials, but it should be noted it was expected. I remain a buyer on weakness, with a time frame measured in months and years and not days and weeks.
-    The mess at Sears Holdings (SHLD) probably should unwind quickly, as I suggested in my 15 Surprises for 2017. It is hard to believe it had anything but a devastatingly bad fourth quarter. I doubt vendors will choose to support it in 2017 in spite of CEO Ed Lampert's latest injection of funds. Sears' sales of $20 billion is a lot of market share for JCP and others to take.

via thestreet