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What Investors Might Have Missed in the Market Last Week

By Daniel Miller – Nov 20, 2016 at 8:33AM

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Retail sales during October posted a strong result, but that doesn't mean all retailers are feeling the love.

Image source: Getty Images.

As far as economic data goes, last week was a strong showing. The number of people who applied for unemployment hit a staggering 43-year low, and housing starts jumped 25.5% to a nine-year high -- though, to be fair, the latter is a pretty volatile report month to month.

Even retail sales checked in with a better-than-expected report for October, up 0.8% compared with September and up a staggering 4.3% compared with a year ago -- heck, September was even revised upward. That helped juice GDP calculations and enabled Goldman Sachs to raise third- and fourth-quarter GDP estimates to 3.2% and 2.6%, respectively.

Sticking with the retail theme, and despite overall results that were outstanding, the market retail sector was full of hits and misses. Here are some companies making big moves or big headlines last week.

A comeback king

Image source: Best Buy Co.

It was only a few years ago that electronics king Best Buy Co. (BBY 3.92%) was seemingly on life support, with investors bailing and sales plummeting. There seemed little hope that Best Buy would avoid going the way of its competitor, Circuit City, which went bankrupt and liquidated in 2009. But then management set forth the "Renew Blue" turnaround strategy, and the company has amazingly set itself back on track -- and last week's better-than-expected third quarter sent the stock up 13% during intraday trading.

Revenue increased 1.4%, compared with the prior year, to $8.95 billion, and domestic segment comparable-store sales jumped 1.8%. The big win came on the bottom line, with Best Buy generating 37.5% growth in adjusted net income, to $198 million, and a 51% increase in adjusted earnings per share to $0.62. Those results were good enough to top analysts' estimates for both top-line revenue of $8.85 billion and adjusted EPS of $0.47.

Best Buy expects a strong fourth quarter as well but might struggle to meet analysts' expectations because of recent recalls that will negatively affect domestic revenue by $200 million. Still, it's impressive that Best Buy has found a way to grow when many brick-and-mortar retailers are closing up shop.

Did Dick's drop the ball?

Investors weren't thrilled with what Dick's Sporting Goods Inc. (DKS 3.49%) had to say about the upcoming holiday season, which sent shares down as much as 10% on Tuesday. It's been an odd year for Dick's Sporting Goods, which performed pretty well through the first six months of the year as Sports Authority, a major competitor, declared bankruptcy rather abruptly -- even after last week's drop, Dick's Sporting Goods' stock is up 56% year to date.

Zooming in on the third quarter specifically, Dick's recorded a 10.2% increase in revenue to $1.81 billion and a 7.3% increase in net income to $48.9 million, or $0.44 per share. Adjusted earnings hit $0.48 per share, above guidance between $0.39 and $0.42. Consolidated same-store sales jumped 5.2% during the third quarter, which was also much higher than the estimated 2% to 3%.

Wall Street's issue wasn't with Dick's third-quarter results; rather, it was with its revised fourth-quarter and full-year guidance, which insinuated a weaker holiday than analysts had hoped for. But, if holiday sales check in with better-than-expected results or its e-commerce sales surge, don't be surprised if Dick's wins back some value of the stock price lost last week.

Not so trendy

Warren Buffett is famous for saying he'll never invest in technology stocks, simply because he doesn't understand them. That's exactly how I feel about clothing retailers -- I just don't get them. I don't understand what's hot, and what's not, and I don't understand which companies are poised to adapt and succeed over the long term. Abercrombie & Fitch Co. (ANF 3.74%) posted a bad quarter and simply reconfirmed why clothing retailers won't make it into a portfolio near me.

Here's what CEO Arthur Martinez said in a press release:

Our third quarter was challenging. For A&F, flagship and tourist locations continued to be a major headwind. In addition, chain-store traffic patterns remained negative. Weakness in A&F was compounded by underperformance of seasonal categories, which ultimately led to pressure on gross margin.

Image source: Getty Images.

Martinez gets points for honesty in an industry that puts more spin on bad news than Michael Jordan put on a basketball. It was a bad quarter, though, with comparable-store sales dropping 6% and a worse 14% at namesake its Abercrombie & Fitch stores. That drove total revenue down 6.5% to $821.7 million, failing to reach estimates calling for $830.6 million. Adjusted earnings absolutely plunged to $0.02 per share, compared with the prior year's $0.48 per share. Even when adjusting for currency fluctuations, its $0.11 adjusted earnings fell flat of analysts' estimates calling for $0.21 per share.

The lesson last week was that, perhaps, a rising tide doesn't raise all boats. Despite retail sales surging in recent months, there are still many brick-and-mortar retailers dealing with major pain and a gloomy future. Invest accordingly. 

Daniel Miller has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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