Last month was a good one for owners of beaten-down retailing stocks. In fact, all three of the best-performing members of the S&P 500 came from this industry. Foot Locker (FL -1.93%), L Brands (BBWI -0.55%), and Macy's (M -0.26%) shares each gained more than 25% in November compared to a 2.8% increase in the broader market.
Foot Locker shareholders cheered the retailer's latest earnings numbers that, late in the month, provided room for optimism -- or at least fewer reasons to expect a collapse over the holiday shopping season. Rather than point to impending doom, comparable-store sales trends improved to a 3.7% decline from a 6% slump in the prior quarter.
That was enough to beat management's admittedly downbeat forecast, as CEO Richard Johnson and his executive team said demand trends benefited from a stepped-up pace of new-product introductions, particularly by its main supplier, Nike. Management predicted this innovation should help Foot Locker modestly outperform their prior outlook that forecast between 3% and 4% lower comps over the holidays.
Foot Locker's business isn't yet stabilized, though. Gross profit margin is still tumbling, thanks to the price cuts that are necessary during weak selling environments like this. Its store footprint appears bloated, too, given those soft-demand trends. As a result, Foot Locker will likely announce closings as part of a wider cost-cutting initiative in early 2018. Its success -- or failure -- at protecting market share over the holiday season will determine whether that's a modest reorganization plan, or one that involves a significant loss of selling space in the core U.S. market.
Selling off valuable properties
Macy's comps declined by 4% in the third quarter, the company said in early November, to continue a long-running negative trend for the department-store chain. Yet the decrease kept it on track to meet management's full-year guidance. As for the key fourth quarter, executives cited strong growth in the e-commerce sales channel, low inventory levels, and a major new loyalty program as reasons to be optimistic that the holiday season will produce just slightly weaker sales and steady profitably.
But a successful Macy's investment today relies at least as much on the company extracting value from its rich portfolio of real estate holdings. That initiative is working well for the retailer, and it recently found buyers for highly prized locations in Chicago and Seattle. Cash from these deals is helping lift earnings results despite Macy's expectations for a roughly 3% drop in comps for the full 2017 fiscal year.
The secret to higher prices
L Brands, the owner of the Victoria Secret, Bath and Body Works, and Pink brands, rose 30% last month as the retailer surprised investors by showing a reduced reliance on price cuts. Fewer promotions led to steady third-quarter gross margins in the core Victoria Secret brand, and management said in early November that profitability would have actually ticked higher except for a slight increase in inventory loss to theft.
The retailer followed up that good news with better operating news later in the month. Sales in November met management's targets even as profitability rose, executives said on Nov. 30, giving L Brands much-needed positive momentum heading into the holiday-season crush.
Each of these stocks is in deeply negative territory this year despite November's spike, which means the recent rally was powered by the businesses simply outperforming Wall Street's low expectations. Thus, investors are still betting that Macy's, Foot Locker, and L Brands will struggle to return to positive comps while protecting profitability over the coming quarters. That pessimism is mostly well founded, but it also raises the likelihood for dramatic stock-price increases whenever operating trends show hints of a turnaround, as they did for these companies last month.