A Retailers Dilemma; Trading Profit For Traffic
One of the biggest draws for consumers is a good deal. Our need for a good deal can be seen in the downfall of JC Penny’s (JCP) ex-CEO Ron Johnson. Johnson had the brilliant idea that, instead of marking down over-priced items, JC Penny would have low prices every day. JC Penny saw its traffic plunge, its comp-store sales decline, its revenue fall, and earnings recede. It wasn’t a pretty picture and it still plagues the company, JC Penny just isn’t what it used to be.
Fast-forward to today. Retailers are so desperate for their share of consumer dollars they are marking down their merchandise to rock-bottom levels. The trend is so widespread it is showing up in macro-data like the CPI so retail-sector investors should be wary.
According to the BLS, all four categories of apparel saw price declines over the past month, largely due to industry-wide markdowns. Men’s apparel saw the smallest decline but still nearly a full percent. Boy’s fell the hardest at -3.9% while Women’s and Girl’s apparel prices fell -3.6% and -2.2%. What this means is that previously issued guidance from America’s top retailers is could be overzealous. The chance for some to miss consensus earnings expectations is now on the table.
American Eagle Falls On Weak Guidance
American Eagle Outfitters (AEO)reported what would otherwise have been a stellar third-quarter report. Revenue grew 7% YOY and beat expectations, EPS beat on a GAAP and adjusted basis, Comps came in ahead of expectations, and the outlook for traffic is steady. The news that drug shares of the stock down by -7.5% in premarket trading was the margins, the revelation of massive markdowns, and their impact on the holiday-quarter outlook.
Due to rising inventory in some categories the company is planning to offer deep discounts. The move is intended as a course-correction so the company can focus on its core brands. What this means for investors is weaker than expected holiday guidance. American Eagle now expects comp-store sales to be flat in the fourth quarter and EPS in the range of $.34 to $.36. The analysts had been expecting 4% and $.46, that’s a big difference and no small hurdle for finicky markets to overcome.
Shares of AEO are now trading just above a two-year low where support is likely to be strong. This will be a very important level to watch because it is a likely pivot point for the market. A fall below this level, near $13.66, would signal a continuation of 2019’s downtrend in stock prices.
No Mark Downs At Children’s Place; Yet
Children’s Place (PLCE) made no mention of markdowns in its Q3 report but it’s only a matter of time. The company’s highly-priced children’s wear is not attracting the traffic it should and that will end in unsold inventory and marked down prices.
Children’s Place posted a small top-line miss for the 3rd quarter and blamed it on two things: warmer weather and “meaningfully weaker” than expected mall traffic. What the company’s management didn’t mention in the press release was the ongoing loss of market share to retailers like Target (TGT).
Regardless, the problems with revenue are expected to linger through the holiday season which is why guidance was meaningfully lowered. The company is now expecting 4th quarter revenue in the range of $505 to $510 million and EPS near $1.53, the consensus was $555 million and $2.06.
Shares of Children’s Place opened to trade lower after the announcement and spent the rest of the morning moving lower still. Down more than 20% by mid-morning, there is still another -10% the stock can shed before price action hits a significant support target. Until then, investors are cautioned from entering this stock too soon, or at all.