Low-hanging fruit. That's what most retailers have already
picked in their quest to cut costs and boost margins. The economic
downturn in 2008 was hugely beneficial for this group as they
right-sized costs to offset dismal sales. Once sales ticked up just
a bit from the bottom, profit reports became quite impressive.
Trouble is, sales gains have petered out -- the June same-store
sales reports that just rolled in were fairly uninspiring. And so
has investor enthusiasm for this sector. During the past three
SPDR S&P Retail (AMEX:
exchange -traded fund (ETF ) has fallen -20% to a recent 36.
Investors have come to think that the still-slow economy means flat
or even negative profit growth for this group. But that sell-off
creates opportunity for far-sighted investors. A closer look at
industry financial statements reveals an important trend.
costs are so lean, inventories are so low and gross margins are so
strong, that only a modest improvement in sales would yield far
more robust profit gains.
Let's look at
as an example. The company posted its first fiscal Q1 profit in
|Cost of Goods Sold
As this table shows, cuts in overhead coupled with stronger
gross margins (which is the result of better inventory control and
thus less markdown activity) turned red ink into black ink. Macy's
makes almost all of its profit during the holidays, but if it can
do better in the out-of-season quarters, then full year results
should get a nice lift.
In this table, I've gone ahead and looked at what first quarter
results might look like next year. With the lower overhead and
firmer gross margins in place, I wondered what profits would look
like if first-quarter sales rose +3%, back to where they were just
before the downturn hit. Turns out,
would jump +39% to $244 million, translating into an
gain from $0.05 in the most recent quarter into $0.07 in EPS in
next year's fiscal first quarter. That helps explain why analysts
think Macy's can boost full-year profits next year by +16% on just
a +2% sales gain.
Notably, Macy's earned nearly $2 a share in fiscal 2007 and fiscal
2008, so analysts think per share profits can exceed that mark,
even as they also assume sales will be about -5% lower than those
2007 and 2008 levels. They're not dreaming. That's what happens
when companies are forced to operate on a much leaner basis.
Action to Take -->
You can run this same exercise for so many retailers. Many of them
have much tighter inventories, much lower overhead expenses, and
thus greater sales leverage when compared to the "good old days of
starts to fall (which could be very soon, or still a ways away),
look for analysts to modestly boost their retail sales forecasts
and much more aggressively boost profit forecasts. Other retailers
I like include
unfailing sales execution
Casual Male (Nasdaq:
for its focus on the underserved big-and-tall men's niche,
Christopher & Bank's (NYSE:
for its strong brand resonance among Midwest females and
Citi Trends (Nasdaq:
, a fast-growing apparel retailer catering to inner-city
-- David Sterman
David Sterman has worked as an investment analyst for nearly two
decades. Most recently, he served as Managing Editor of
RealMoney.com, the premium website of TheStreet.com. David has made
numerous media appearances over the years, primarily on CNBC and
Bloomberg TV, and has a master's degree in management from Georgia
Tech. Read More...
Disclosure: Neither David Sterman nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.