Heady days for retail, right? Great results for companies such as bebe (NASDAQ:BEBE), Chico's (NYSE:CHS), and Abercrombie & Fitch (NYSE:ANF) have some people buzzing about the "renewed strength of the consumer."
Well, maybe. But maybe not.
Retail might be one of the most heterogeneous sectors in the market -- one concept can be rocket-hot while employees at the store next door watch tumbleweeds roll by and fantasize about moving on to working at a Dippin' Dots stand.
Kellwood (NYSE:KWD) isn't fighting off the tumbleweeds just yet, but business in the first quarter was not good. Sales dropped 7% in the quarter, operating income fell by 44%, and net income got cut in half. Leading the decline, women's sportwear was down 18%, with almost a third of the drop coming from weakness in the dress category.
Unfortunately, Kellwood is a leader in the dress category. Usually being a leader is good news, right? Well, yes. But look around your office -- how many women are wearing dresses? Last time you went to the mall, how many women were wearing dresses? See the problem?
Also unfortunate, the fall season isn't looking so great right now, and Kellwood management lowered its earnings guidance. Management also said that it is seeing increased markdown allowances. Now, that doesn't automatically mean that Kellwood's products are bad -- we've heard about retailers like Saks (NYSE:SKS) abusing allowances to make their numbers -- but it's not a good thing, either.
At the risk of sounding overly alarmist, I think Kellwood could have a bigger problem. Kellwood is well-positioned in moderately priced merchandise, but that's not what's really selling. The hot markets are in specialty stores (the aforementioned Abercrombie, Chico's, etc.) and high-end department stores. For regular old department stores (where Kellwood sells a fair bit o' merchandise), business is not quite so hot.
All is not lost, though. Kellwood does have a plus-priced line, and that business grew 11% in the quarter (though the numbers would suggest that it's less than one-sixth of the total). What's more, the dividend is still more than covered and the balance sheet is in decent shape.
Valuation doesn't look bad, but this is a tough, tough business. Margins are tight, customers are fickle, and the retailers have the real power. While a stable of well-known brands could lead better results for Kellwood with the next season, I'm looking farther up the retail food chain for investment ideas.
For more on the retailing world:
- Does Wal-Mart Deserve to Be Hated
- Are Dollar Stores Approaching Saturation?
- Gap's Fashion Sense
- Penney Adds Up
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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
