Dechiphering the Retail Industry
Tim is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
It’s no secret investing is hardly an exact science. Whether you’re new to the markets or run billions of dollars as a fund or portfolio manager – this ain’t easy. If there was ever an example of just how whacked the world of investing can be, the host of data on all things retail is it.
A quick look at the headlines is about enough to make the most even-keeled among us swoon – “Retail Sales in US Cool…” followed by “Retail Sales Edge Up, Inflation Flat…” and not to be outdone by “Home Depot Post Higher Profit, Sales.” And now to really set your brain on fire the last headline on Home Depot (NYSE: HD) was followed by “Home Depot Sales Disappoint.” So naturally the stock is down; in Home Depot’s case it dropped nearly 5% at the open (though fighting its way back – as it should be).
Now you might think a review of all this data from a macro perspective would instill some reason to this rhyme – alas, it’s not to be. The recently announced Retail Sales report for April muddies the waters even further. In the report, building materials was one of the sectors dragging down results – the month ended with a drop of 2%, the worst decline in a year. And this data was released the same day Home Depot absolutely destroyed last year’s results (more on that in a bit). What?
Okay, So What Now?
If you’ve been around a while this kind of day may not be overly surprising – still whacked mind you – but not surprising. There are a lot of ways to digest and subsequently act on this seemingly contradictory information, investors do it everyday.
For short-term and momentum investors the nuttiness is a godsend. The more volatile the markets the more opportunities it holds. And while there’s certainly nothing wrong with getting in and out – hopefully with a couple of extra dollars in your pocket – most of us don’t have the time, stomach or inclination for that kind of thing.
Here’s a plan better suited to John and Jane Investor - find a well-managed company that is consistently growing sales, earnings and cash flow – ideally in an industry that is supported by burgeoning economic factors. The retail industry fits the bill nicely – regardless of which headline you choose to hang your hat on.
Home Depot’s 27% jump in Q1 earnings and upwardly revised sales and profit expectations of nearly 8% for the 2012 fiscal year is what investors should be focused on – not the day’s contradictory headlines.
Saks (NYSE: SKS) is another example of today’s straight jacket-like logic, at least for those with a short-term outlook. The high-end retailer has lagged some others due to concerns that consumers weren’t ready to shell out the big bucks quite yet. Saks announced earnings on Tuesday that exceeded both last year’s results – by a whopping 12.5% - and even the vaunted analyst expectations for the quarter. Why? Management said the surprisingly positive results were because they sold more full-priced items. In other words they didn’t need to buy customers (not yet anyway) – something investors saw recently when competitor Nordstrom (NYSE: JWN) announced earnings last week. Here's more on that from last week’s article. As for Saks, to be fair management does have concerns about some particular lines and the profit margins of those items in Q2, but does that warrant today's stock price hit?
Also supporting the notion consumers are opening their wallets for some of the more spendy and non-essential items was - yet again - the retail sales report. One of the leading sectors driving the increase? Furniture - hardly cheap and certainly not a consumer staple.
A couple of additional options in the retail industry are not new to readers - Wal-Mart (NYSE: WMT) and Target (NYSE: TGT). Both retail leaders continually impress with rising same-store sales figures and earnings - yet both remain woefully undervalued. Add in the best dividend yields in the industry and you're left with two fantastic mid to long-term investments.
Wrapping It Up
Consumer spending and confidence continue to improve – whether these meet the ever-changing monthly growth expectations of analysts or not. Employment figures are in the same situation – you know the macro economic climate is better when putting 115,000 new citizens on the employment payrolls is “disappointing.” Considering this - and for investors willing and able to look at next quarter or even next year instead of the next headline - the retail industry offers a slew of opportunities.
timbrugger has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend The Home Depot. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.