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3 O'Clock High: Retailers in the News


"It's tough to short retail when the buy-out groups are out hunting"

Today's Wall St. Journal has a couple of articles of note for investors in retail stocks.

At the front of the paper is the news that arts n' crafty chain Michaels (MIK) is considering putting itself up for sale. This news, which came from Michaels itself and is also reported here, among other places, has spiked Michaels stock nearly 15%.

With apologies to Prof. Depew and Stephen Colbert, Here's what you Need to Know:

  • 2006 has and will continue to be a tough year to be short "beaten down" retailers (and any year is a tough year to make money shorting retail high-fliers).
  • I'm not tellin' you what to do but I wouldn't be buying Michaels today. They should be able to eventually capture a premium, in the event of a sell-out. The words "should," "eventually" and "in the event" preclude the previous sentence from serving as the cornerstone of an investment thesis.

Flipping to section B, the WSJ has a "Think Piece" on the 4 year old turnaround effort at The Gap Inc. (GPS). The gist of the article can be easily inferred from the title "Executive Suite At the Gap Has Revolving Door."

To paraphrase: "Gap CEO Paul Pressler is shuffling the deck like Steinbrenner, trying to put together a team that can finish cleaning out the mess left behind by the last CEO and get the Gap, and its stock, back on a consistently winning track. Pressler's effort at a new division, Fourth & Towne, is making the Old Navy fiasco look like a hit and traffic is down at all major divisions. The balance sheet is improved but challenges remain."

The article concludes by noting Mr. Pressler's (correct) estimate that store traffic patterns lag one or two quarters behind merchandise improvement.

You Need to Know...:

  • Avoid buying the stocks of retailers attempting a turnaround until you can see it in the stores.
  • The vast majority of operational recovery efforts fail. The Gap has abused shopper confidence for years and it remains to be seen if traffic can ever get back to a position near the top of the specialty heap. History suggests they won't.
  • If the Gap gets its groove back, you'll miss 15-odd-percent of the stock recovery before you get a chance to buy. Unlike the same move in Michaels' today, a 15% move once (if) the Gap starts hitting again will have more gains ahead of it as the stock multiples begin to recover.
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No positions in stocks mentioned.

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