Will Spring Bring a Shower of Sales for These Retailers?

Winter has been hitting the retail sector hard, as the cold weather has kept customers away from their favorites stores. The coming of spring is a welcomed sign, and market expectations predict an improvement in sales due in part to pent-up demand.

The Thomson Reuters Same Store Sales (or SSS) Index's actual result was 1% lower than its expected dismal forecast of 2.8%; the February figure showed a gain of 1.8% in same-store sales. Excluding the drugstore sector, the same-store sales growth rate declined to just 0.3%; this is the weakest result since August 2009's result of -2.9%. In comparison, January same-store sales rose 3.1%, and the figure excluding drugstores was 3.6% higher.

45% of retailers missed their estimates this past quarter. Some of the worst were Gap (NYSE: GPS  ) and American Apparel (NYSEMKT: APP  ) , while those with better results included Walgreen (NYSE: WAG  ) and L Brands (NYSE: LB  ) .

Company

Actual SSS %

Estimate SSS %

Surprise %

Walgreen

4.5

4.5

0.1

L Brands

2.0

1.4

0.6

Gap

-7.0

0.9

-7.9

American Apparel

-5.0

n/a

n/a

Source: Thomson Reuters

Gap, which is heavily weighted in the apparel sector, led to the index's decline; without Gap, the apparel sector would have posted a 1.3% increase. Shares of the retailer closed down about 1% on March 10 and currently trade at a reasonable 12 times 2016 earnings.

Another apparel retailer with weak results was American Apparel. The controversial retailer is considered by research consultancy Brand Keys as a brand that has failed to engage with its customers. It's uncertain whether one of its latest ads, featuring a topless employee, will spark interest in the brand or turn customers off. Losses are expected to continue through 2014. The stock has taken a dive since the start of the year's price of $1.19, decreasing about 40% to its $0.72 close on March 13.

Drugstore sector is a bright spot
On a more positive note, the drugstore sector helped to prop up February same-store sales results, which would have otherwise decreased to 0.3%. Walgreen has been able to drive shareholder value for the past five years. It has posted nearly $11 billion in generally accepted accounting principles net earnings, operating cash flow of almost $20 billion, and a shareholder return of 145%. The retailer's partnership with Alliance Boots and collaboration with AmerisourceBergen has broadened the company's global reach -- Walgreen operates 11,000 stores and 370 distribution centers in 25 countries.

Part of the company's growth strategy is to expand its community pharmacy services; its health-care clinics offer preventive health testing, treat minor health issues, and help customers manage ongoing health issues. Long-term guidance for Walgreen going into fiscal 2016 estimates adjusted operating income of $9 billion to $9.5 billion. Synergies of $1 billion are expected from the company's partnership with Alliance Boots, and operating cash flow should approximate $8 billion.

Outside the drugstore sector, women's fashion retailer L Brands also had better-than-expected sales during February. The company's main focus is doubling its business in North America, and it also sees substantial opportunities abroad that are expected to increase the total operating margin. Part of its strategy is to maintain a strong cash and liquidity position and return excess cash to shareholders.

The company is ranked within the top six retailers for highest total returns for three-year, five-year, and 10-year periods. Its returns are also well above the S&P Retail index's returns for the same time periods. L Brands has also done a good job of managing expenses -- since the fourth quarter of fiscal 2009 expenses have not exceeded sales.

 

3-year return

5-year return

10-year return

 L Brands

35.5

54.2

20.4

 S&P Retail Index

24.0

28.0

11.0

Source: 2014 ICR Xchange Conference presentation

My Foolish conclusion
As the spring season rolls around, the market expects an overall improvement in retail sales. Companies like Walgreen and L Brands, which posted recent gains in same-store sales, should come out as clear winners; April sales may show a noticeable improvement in customer traffic.

Gap's sales decline came as a surprise, as the retailer had to close several hundred stores due to bad weather; warmer weather should improve results. American Apparel, however, may not fare so well, even with the winter weather subsiding, due to its various brand-related issues. So, investors could see higher share prices for these retailers as customers head back to stores.

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