Winners and Losers Over the Holiday Season

Investors hoping the critical month of December would bring in a surge of profits for retail chains could be disappointed today, when same-store sales figures begin to release. Macy's (NYSE: M  ) and Kohl's (NYSE: KSS  ) both saw an increase in sales, topping analyst expectations. I'll detail hurdles they faced, and how they succeeded during the holidays where many failed. Best Buy (NYSE: BBY  ) has yet to release numbers, although I predict it falls short of analyst estimates. That said, does Best Buy represent a value play and turn around story? I'll dig into the details, and tell you what I think. First, lets look at analyst expectations to understand what they were looking for going into the holiday season.

Expectations
According to Retail Metrics, a company that provides independent research on the retail industry, consensus estimates for December same-store sales are a slight increase of 1.9%. Clearly, analysts weren't too hyped about sales going into the holidays.

Expectations were already low, and Ken Perkins, president of Retail Metrics, said that if his estimates hold true, it would be the worst-performing December for retailers since 2008. Perkins also goes on to note that December typically represents one-fifth of total annual sales. Under performing for the holiday season would be a devastating blow to retailers and those invested in them. On that note, let's check into Best Buy, which hasn't reported yet, and I'll tell you why I think it will fall short.

The hits keep on coming
Best Buy is all too accustomed to bad news, and has seen three consecutive quarters of declining EPS. Those dismal earnings led to its stock price plummeting 50% in 2012. 

An analyst from Morgan Stanley cut Best Buy's estimated EPS due to weak retail demand and higher sales of Apple  (NASDAQ: AAPL  )  and Google  (NASDAQ: GOOGL  )  Android devices with heavy discounts.To get an idea of how well Apple and Google devices are selling, I looked at a recent report that shows the number of device activations of iOS and Android combined. It shows a 150% increase, to over 50 million activations for the holiday season. The popular tech devices, including phones, iPods and tablets, are often sold with large promotional discounts, leaving unhealthy margins for Best Buy, and little to gain on the bottom line. The only way for Best Buy to come out ahead of expectations, by boosting margins, is if it cross-sells other in-store products while promoting Apple and Google devices. It doesn't have a promising track record of accomplishing this, with net margins in decline every year since 2010.

Best Buy is a company you should stay away from after the holidays. It is far from a turnaround and, on Monday, announced two resignations from its board of directors. Its stock is a dangerous place to put your hard-earned money. I would avoid it as an investment, as there are much safer opportunities to earn better returns.

Uphill battle
Two department stores that I thought might fall short in holiday sales are Macy's, the second-largest U.S. department store chain, and Kohl's, the third-largest U.S. department store chain. With consumers shopping earlier in the holiday season, seeing November sales declines for Macy's and Kohl's at 0.7% and 5.6%, respectively, was a bad sign heading into the holidays. These retailers faced the difficult task of luring early shoppers back into their stores for additional shopping. Macy's did its best to fight slower mall traffic with extended hours the weekend before Christmas, while Kohl's offered a hassle-free return policy for the holidays, giving customers incentive to shop at its stores.

Both stores have weather-related factors that influenced sales. This week was the first time I had to break out my winter coat, and I haven't considered purchasing any additional winter clothing at all. Kohl's women's, men's, and children's apparel represents about 64% of sales, while it represents roughly 48% for Macy's. Extended periods of warm weather make it difficult to sell winter apparel over the holidays.

Another factor that will have an effect on the retailers' holiday season is the aftermath of Superstorm Sandy. Management for these companies expected pent-up demand to boost holiday sales, because Sandy slowed November sales in the Northeast. If the pent-up demand hadn't materialized, the retailers would have been stuck with a large miss.

So how did the numbers shape up for these two? Macy's strategies to lure customers back with late discounts worked, as it reported a 4.1% increase in same-store sales for December, exceeding the consensus projection of 3.7%. Kohl's also topped estimates of 1.3%, with a 3.4% increase in same-store sales.

Going forward
Even as Macy's and Kohl's both topped expectations, they both rolled back future earnings guidance. Macy's now expects fourth-quarter earnings of $1.91 to $1.96, down $0.03, and lower than the consensus analyst estimate of $1.98. Kohl's came in with a much larger reduction, expecting fourth-quarter earnings at $1.60 to $1.62, compared to previous estimates of $2.00 to $2.08. While these reductions aren't pretty, I believe it stems from deep discounts to lure necessary customers back into the stores to reach plans for holiday sales. If their share price drops in reaction to lowered guidance, I believe these companies offer solid investments that you could pick up at a discount.

Bottom line
Sleep easy, investors; Macy's has beaten analyst expectations for the last six quarters in a row. The company is also developing the "My Macy's" program, which delivers custom-tailored merchandise, and marketing campaigns customized for different regions. All of those factors should improve customers' shopping experiences and, more importantly, their overall satisfaction. It has seen a steady increase in yearly revenues, net income, and margins since 2009. Both Kohl's and Macy's had success in a holiday season where many retailers failed. Both had hurdles to overcome, and executed their marketing strategies to lure consumers back for additional sales in December. Both warrant a deeper dig and potential investment the next time you look into buying stocks.

The brick-and-mortar versus e-commerce battle wages on, with Best Buy caught in the middle. After what might have been its most tumultuous year in history, there are now even more unanswered questions about the future for the big-box electronics retailer. How will new leadership perform? Will old leadership take the company private? Will a smaller store format work out for both the company and its brave investors? Should you be one such brave investor? To help answer all these questions, The Motley Fool has released a new premium research report detailing the opportunities -- and the risks -- in store for Best Buy. Simply click here now to claim your comprehensive report by today.


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 04, 2013, at 1:23 AM, kc3611 wrote:

    What you forgot to mention in your article is how well the bby sales are doing in the appliances and service sectors. The other low margin items your talking about is being felt by every retailer. I'll bet you bby sales are going to surprise you and the street. BBY was number 3 in online traffic, needless to say, thier online sales will be up from same store sales last year. I obtained my info from best buy. The media is just reporting the negative and none of the positives for whatever purpose.

  • Report this Comment On January 04, 2013, at 9:37 AM, TMFTwoCoins wrote:

    @kc3611

    Regarding your online sales points, you're correct, that will be a factor. Although in a previous article I pointed out how it wouldn't save them. That said, I showed a survey of how Best Buy was also beating Amazon in online traffic through mobile devices, which I thought was particularly insane given Kindles success.

    So all that aside, if Best Buy defies my predictions and beats the street, does it make them a valid investment? Not in my opinion, not even close.

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