Minyan Mailbag: Wal-Mart's Soft Numbers
Companies trying to hide something blame outside forces for their personal failings.
Minyan Iron Mike writes:
I've very much enjoyed reading your thoughts (particularly concerning the retail space) on Minyanville. I was doing some work on Target (TGT) wondering if they will meet or beat estimates when reporting same store sales tomorrow. I conducted an archive search going back a year on Briefing.com and noticed that Target always gives an "update" or "guidance" (each Month) on how their sales are tracking. Well, I noticed that they have NOT commented on May same store sales (or according to Briefing.com they haven't). Should one read anything into this??
With Wal-Mart (WMT) guiding May sales in the lower end of their previously stated range, and Target's lackluster recent quarter, can one assume that May sales may not be good? Just curious if you have any thoughts on this, particularly in Target's apparent lack of communication (at least to my knowledge). Thanks for your time.
Let's start with your second paragraph and address Wal-Mart's soft May Same Store Sales data. In so doing, perhaps we can shake-out an example or two of what a company looks like when they are at a slow and steady decline into negative growth (as opposed, say, to a company well into a stunningly successful turnaround effort).
Our goal isn't to goad Wal-Mart or even those (read: Red Katsenelson, here and here) who have disagreed with my oft-stated bearish take on the retail Goliath. On the contrary, I'm just trying to help in my humble little way.
Wal-Mart's "Red" Flags:
- Releasing Same Store Sales on a Saturday. There are exactly two real reasons for a company to deviate from the normal procedure of releasing monthly sales on the first Thursday of the following month.
1. The company doesn't have the systems to compile the figures in a timely manner.
2. The company is trying to hide something and/or lessen the impact of a lousy number.
Wal-Mart has good systems and actually got the data out early. A cynic would conclude that Wal-Mart, perhaps in an effort to appease the analysts who got caught upgrading WMT in the last month, sought to reduce the impact of a sales miss by releasing the news during Saturday on a long weekend.
- Wal-Mart blamed gas prices for the miss. We may hear much about gas prices when we get the full slate of sales data from the retailers tonight and tomorrow. Every single one of the 30-odd names I cover in the Retail Round-Up may very well complain about gas prices for missing SSS.
Even if that happened, which it won't, it wouldn't make it right. Blaming gas is like blaming the weather; it's not under your control, good or bad, and thus has no place in a monthly sales report.
A company hitting on all cylinders says things like "The price of gas hurts our customers which is why we are doing our best to locate 200k foot stores in every market greater than 5,000 people. As is, you can't launch a protestor out of a jumbo Wal-Mart trebuchet without the dirty hippie landing in another Wal-Mart parking lot. No matter where you live, unless it's commie-haven Hercules California, you've got a Wal-Mart within a short drive. With our best-of-class efficiency and ubiquity we are frankly rooting for an escalation in Mid-East tensions… wait… that last part was strictly off the record… stop writing… This interview is OVER!"
In contrast, companies trying to hide something blame outside forces for their personal failings.
Another problem with the gas excuse is that retail prices of gas have fallen since Wal-Mart reported strong SSS in April. Specifically, according to this useful EIA web-site, the average price per gallon fell from $2.966 to $2.913 from May 1st through May 29th.
So, while it may be the case that Wal-Mart would rather conduct business in a world where gas cost ten-cents per gallon, and that the company would have blown the doors off SSS estimates given that dime-per-gallon world, it's just not an excuse for missing sales during this particular period. A much more logical explanation might be that Wal-Mart sold a TON of low-margin candy during April and couldn't convince their customers to re-load on those fuzzy candy eggs in May, to celebrate Memorial Day.
Oh yeah, Target (and the rest of the retailers)…
Now that we've established what a flailing blue-chip might look like, what can be inferred from Target's silence on the heels of their atypical earnings miss for Q1?
I'd like to think the gang in Minneapolis isn't hiding but rather behaving in the grand tradition of the stoic Norseman, regrouping on the heels of a lost battle. There are times to talk and times to execute; this is the latter. When you talk before you should you end up getting premature upgrades of your stock; leading to hostile analysts.
But there we go, starting to talk about Wal-Mart again.
Target has a genuine soft-goods business. They should have been able to offset a late Easter hangover to put up enough high ticket, higher margin sales to at least come in at the estimate tomorrow morning.
I don't think things are going particularly great for Target or any other mass-merchant. There are plenty of very good reasons for this and, yes, those reasons include the price of gas. That said, good retailers use bad economies to take share, not as excuses. I think Wal-Mart's moaning can be fairly construed as a "tell" that business isn't great but I also think it says more about Wal-Mart than it does about anything else.
I think the companies who were doing great leading into this month will be fine, if not inspiring, tomorrow. Remember, the numbers for April were very strong across the board, a little give-back is to be expected.
All of which is a long way of saying "I don't know if Target meets or beats tomorrow but I'm not reading too much into Wal-Mart. Even if I did know I'd probably keep it to myself, simply to encourage everyone to tune into the Round-Up tomorrow morning. That said, and by way of an additional Round-Up teaser, I can tell you my top-five names going into the numbers":
- Target (TGT). Unless Target has totally collapsed Wal-Mart has set TGT up for a can't-lose release in the morning. If Target misses sales, well, Wal-Mart already made enough excuses for everyone. If Target beats their estimates it'll make Wal-Mart and the upgraders horrible.
- Abercrombie & Fitch (ANF). Do teenagers even care about the price of gas? ANF has been on fire… a miss here would bode poorly for the retailers this summer.
- Nordstrom (JWN). Has quietly become the best of breed department store. Why don't I own it? [insert mumbled vulgarities here]
- Gap (GPS): "CEO Paul Pressler; the board of directors would like to see you now… bring your playbook"
- Home Depot (HD): Ooops… HD isn't going to report Same Store Sales anymore. Not that they are trying to hide anything…
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