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Retailers on Santa's Naughty List


What do the "challenging" results for December tell us about the consumer as a whole?

Retail sales were bad in December. Bad as in "lousy", "soft", "weak", "unsatisfying", "lacking", "tepid", "underwhelming", "wanting", "meager" or "light".

The sales results weren't good, is what I'm saying. I'm reasonably confident that's what others will be saying about them as well. The question is what, if anything, we can do with retail stocks and what the "challenging" results for December tell us about the consumer as a whole. Let's break it down group by group and see what we can infer.

Club Stores: There is Only One

With BJ's (BJ) coming in light as expected and Wal-Mart's (WMT) Sam's Club missing as well, that leaves exactly one publicly traded club store beating expectations on a regular basis: Costco (COST).

In a retail stock environment where apathy passes for bullish, Costco stands alone as best-of-breed in the Clubs and maybe, just maybe, the only retailer you can own with any conviction in 2008. Costco is a great merchant in an era of fading champions (Target (TGT), we weep for you) and only mildly inspiring comeback stories. Costco is the Larry Holmes of retail stocks; a first-ballot Hall-of-Famer but somehow still uninspiring.

Discount Chains: The Empire Strikes Back

Wal-Mart is back. The stock is still dead-money, growth expectations remain single-digit and I wouldn't want to have to shop the stores but Wal-Mart is back to being too good to mock. The Bentonville Behemoth beat SSS estimates by a couple percent, driven by the discount division which came in at 2.4% vs. 1% expectations. What's more, Wal-Mart decisively beat Target over the holiday season.

There's good news and bad news to be drawn from Wal-Mart's comeback. On the downside, it doesn't lead to a ton of investment pros. You can try the suppliers, like VF Corp (VFC) but Wal-Mart is a notorious ball-buster to suppliers. What's good for Wal-Mart is not good for the suppliers. You could try Wal-Mart as a long idea but, be serious, 2.6% same-store-sales growth is still lagging inflation. Wal-Mart was a bad short when they were struggling and, I suspect, they will remain a dull long as they comeback.

The good side is this: when Wal-Mart is getting customers it's hard, if not impossible, to say the consumer is entirely dead. Wal-Mart does a billion in revenues every day. It is 5x the size of Target. If the US consumer was dead, Wal-Mart couldn't save it. If the consumer was at all vibrant, a revitalized Wal-Mart would be doing better than 2% SSS off such a low performance base.

The conclusion: Wal-Mart is back... Yawn.

Specialty & Department: The Toughest Trade

Specialty apparel was an absolute mess in December. Of the companies I follow, Ross (ROST) and Guess? (GES) beat. Both stocks are near 52-week lows. Gap (GPS) missed and is becoming ever less interesting as a stock. Department stores looked slightly better than expected, with former darlings JW Nordstrom (JWN) and Saks (SKS) beating estimates by a wafer-thin margin.

The issue on these names is this: You can't own them in this environment. Your upside looks like Dillards (DDS), bouncing fairly nicely but way, WAY, off the highs. Your downside looks like Men's Wearhouse (MW), down over 25% today alone, trading at a PE of 5 and still not seeming cheap.

There's a time to trade retail and a time to duck and cover. This is the latter. Batten down the hatches and hold on to your Costco if you need to play the group. Otherwise, hold your fire and wait for the recession debate to go from "is it here?" to "How long will it last?". The downside reaction of stocks like MW, where the bad news could have been argued to be "in" the stock before today's debacle, tells you the trend is lower.

Tune into this space next month at this time, when we hear about the January effect on Guest Cards and get some preliminary guidance from the cos. Until then, you might want to hold your fire on these retail stocks, as a whole.

Jeff Macke & 30 other top traders give their ideas and insights in real-time on Buzz & Banter. For a trial, call 212-991-9357 or click below.
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No positions in stocks mentioned.

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