RetailWire’s 4Q07 Retail Stock Portfolio Challenge: Final Results
By Rick Moss
In reviewing our first Retail Stock Portfolio Challenge results, one might conclude that predicting losers is a lot easier than winners in the world of retail. And yet, short-selling isn’t as easy as it might appear. Had David Livingston tried that tactic with Nordstrom – down over 30 percent for the quarter – his victory would have been even more dramatic. Even so, congrats are in order for Mr. Livingston who deftly counted on Sears and Winn-Dixie to be profitable disappointments and, with nearly a five-point total yield, looked impressive enough next to a 14-plus percent drop in S&P’s Retail Index during the quarter.
For Mark Lilien, a portfolio anchored by a couple of stalwart neighbors to the north and south – Sears Canada and Wal-Mart de Mexico – looked initially like a solid, conservative strategy, but those two retailers took a sharp nosedive in the final weeks. (Good buys now, perhaps.)
George Whalin…what can we say? You had the distinction of choosing the best performing company for the quarter – J. Crew; up over 16 percent – and the worst two – Nordstrom and Kohl’s. Clearly, timing is everything. Standard and Poors is currently giving Nordstrom a positive 4 STAR (out of 5) buy rating.
Click to see detailed portfolio results…
But let’s hear what our contestants had to say. Did they learn anything from the experience?
David
Livingston, Principal, DJL Research
Usually the only way to win a competition like this is to take a risky strategy. Simply picking good companies and hoping they report good news will generally only produce modest results at best.
I was hoping to score big on Sears Holding and Winn-Dixie by shorting their stocks. Jim Cramer recommended Sears only because he used to drink beer with Eddie Lampert and thought somehow, magically, the chairman would pull something off. But one thing all of us in retail knew was that, as far as sales go, Kmart and Sears are duds and only bad news would be coming out in the near future.
I figured the hype on Winn-Dixie would wear off soon and the false façade of a rebound would come to light. And it has. Kroger is doing great and reporting good numbers. Unfortunately for me, it did not reflect in the stock price. Going long on Kroger is probably a good long-term strategy but way too conservative for a short-term contest – my mistake. A&P is near even as I write this. I shorted A&P hoping they would really mess up the Pathmark deal. They didn’t, but luckily they didn’t go up too much either. If I had it to do over again, I still would have shorted them.
Mark
Lilien, Consultant, Retail Technology Group
2007 Q4 was awful for retailing stocks. The S&P 500 declined four percent, but the Consumer Discretionary sector (which includes retailers) declined 10.5 percent. The only sector that performed worse: Financials, down 15 percent, due to the subprime crisis.
All three contestants beat the S&P Consumer Discretionary Index, but the only profitable strategy was David Livingston’s shorts. Only two of nine U.S. stocks rose, and none of the foreign stocks. Biggest decliners amongst our picks: Nordstrom, Kohl’s, Sears (U.S.), and eBay. The only two gainers: A&P and J. Crew. Was there a theme?
George
Whalin, President & CEO, Retail Management Consultants
First, I would like to report that I won’t be giving up my consulting business and becoming a stock picker any time in the near future.
While nine of the 12 stocks that were picked by the three of us decreased in value during the period, it will be interesting to see what happens when these companies report their results for December. The lesson here could very well be that stock values don’t necessarily reflect the short-term sales results that retailers produce.
Holiday 2007 may go down as one of the most unusual we’ve seen in many years. Consumer volatility and media that embraced the idea retailers were desperate all seemed to fuel what at first appeared to be a very down year.
When sales in stores for the last week of December and first weeks of
January are coupled with online sales and the entire shopping season we may find it wasn’t so bad after all.
Discussion Questions: Do you see any correlation between the performance of the stocks in the contestants’ portfolios and the results of the Holiday ’07 season? Looking forward to 1Q08, do you see any interesting indicators for the stocks in the portfolios?
Until stores finish fiscal December (this Saturday) and report comps next week, it’s hard to correlate the results with the stock performance. And because of the fiscal calendar shift, you really do need to look at November and December together to judge each store’s comp performance. That only tells part of the story: How are inventory levels after Christmas? How much clearance is left, and will its liquidation affect the 1st quarter? What kind of margin hit (if any) are general and apparel retailers going to take for the 4th quarter?
It’s hard to assume that this fall’s recent pattern of sluggish sales is going to perk up anytime soon. However, several of the companies who had the toughest stock performance during the 4th quarter still have fundamentally sound execution and market position–and are trading at very low P/E multiples in many cases. In the event that spending becomes more robust later in 2008, these may look like bargain prices in the long run.
I’m afraid I’m inclined to agree with Richard. I don’t see relief around the corner. There may be an artificial uptick thanks to it being an election year but overall I think in 2008 we’re going to see more mortgage foreclosures, higher fuel costs and (sooner or later) somebody is going to calculate the impact of the wars in Iraq and Afghanistan on the long-term economy which ought to make a grim retail picture even darker.
Given the challenging economy, it will probably be easier to pick retail stocks to short in 2008.
As the recent holiday season showed, major retailers are still in the process of transforming their businesses to address the new cross-channel realities of the current market.
It will be interesting to see if Wall Street starts to look deeper than comp store sales to measure the success of retailers. Other metrics such as the growth of a retailer’s e-commerce business, foot traffic and site visits, conversion rates and customer profitability will likely be just as telling about the future success of a retailer.
Consumers are fragmented into many segments; the economy has different levels of uncertainty for those segments. As Ryan notes, there are many factors fueling continuing uncertainty. Those retailers that read the consumers well will have had good holiday sales, little leftover inventory, and will have adjusted replenishment strategies for January.
Learning about revenue in December, the kind of leftover inventory sales and/or revenue in January, and end of the year profitability are necessary pieces of information and their impact on stock prices are important for determining which stock picks were most successful.
Kroger was one of my duds but I read it was up 17% for the year. That meant all the good news they reported was factored into the price long ago. Christmas sales at many companies were disappointing and the bad news may be already factored in. Many companies will candy coat this bad news, so I would expect to see some gains in the first quarter.
I felt good about shorting Sears Holdings since they are the lowest sales per square foot performer on the planet. That was reaffirmed by seeing about five rattletrap cars in the Kmart parking lot on Christmas Eve. Kohl’s I do not follow much, however, based on the fact that at almost every Christmas party I went to this year, nearly all the presents were in Kohl’s boxes. It got me thinking that this company is going to be reporting some good numbers regardless of what any experts say.