The Week for Retail

8/16/15

This week is going to be all about retail sales with the likes of Target, Home Depot, and Walmart, reporting earnings. It’s been a mixed bag thus far for retailers, with Michael Kors and Nordstrom beating estimates and Macy’s and Kohl’s badly missing. Retail sales came in better than expected in July, however I am not optimistic in the short-term. The consumer does not seem to be spending on clothing or fashion, and beyond spending money on their homes and cars, most consumers seem to be saving rather than spending. However, if you’re looking to fill positions in your long-term portfolio, you may get some good opportunities to buy the dips post-earnings. With that said, here’s a look at what’s coming this week:

TUESDAY (DKS, HD, TJX, WMT)

Dick’s Sporting Goods (DKS), Home Depot (HD), TJX Companies (TJX) and Walmart (WMT) all report before the market opens on Tuesday and my favorite in the group is Home Depot. The stock has done terrific during this recent market turbulence, closing at $119.75 on Friday, just off all-time highs. Housing seems to be the biggest area where consumers are spending money. Whether you are buying a new home or doing some remodeling projects, Home Depot is a direct beneficiary of that business. I wrote a while back about how their e-commerce business is taking off, and I expect to see that continue to be a huge area of growth for the company. Analysts are expecting $1.71/share on revenues of $24.68B and given how strong the housing market, I like them pre and post earnings, short and long term.

Three months ago, Dick’s Sporting Goods posted solid first quarter earnings and raised full year guidance, however since reporting earnings, the stock is down about 10.5%, closing on Friday at $50.40. The company has actually beaten earnings over the last four quarters, however, investors are concerned about their struggling golf business and are unsure that management can turn that around quickly. On a technical basis, the stock has been consolidating between $48.77-$53.18, trading around the 38.2% and 61.8% retracement, respectively. Given how big of a quarter that Under Armour had and how well Nike has been performing, I actually like Dick’s right here. However, the options market is pricing in about a 7% move in the stock, so if you can stomach a 7% risk, I would suggest buying half before earnings and half after earnings, but you don’t have to buy on Tuesday’s open. The stock has a history of closing lower than it opened on the day it reports earnings each of the last four quarters, and I don’t see a reason that doesn’t continue.

TJX Companies has been one of the best performing retailers for quite some time and I expect that to continue. Quarter after quarter, TJX continues to impress; having beaten earnings estimates each of the last four quarters, and I see that happening once again. TJX has pushed further into the home furnishings business, which as I mentioned when discussing Home Depot, is the sweet spot for the consumer now. I like TJX long-term.

Walmart seems to have bottomed at $70, but also can’t seem to get out of it’s own way. Last quarter I recommending the stock because I believed all the bad news was already priced in. However, that turned out to be wrong, as the stock continued its slide down another 10%. I think there are better places to put your money to work, including the three previous stocks mentioned, so just stay away from Walmart right now.

WEDNESDAY & THURSDAY (TGT)

Target has come a heck of a long way since the hacking incident a couple years ago, and closing at $79.35, is 7.5% off the all-time highs hit in mid-June. CEO, Brian Cornell has come in with a fresh perspective of the company and I like a lot of the improvements that I have seen, even from a consumer perspective. The company is operating more efficiently having eliminated the Canadian Target project, increasing its grocery business, improving on the in-store shopping experience and becoming more competitive in e-commerce. I like Target long-term, however technically, the stock is in no-man’s land. There is a lot of support around the $72 level (50% retracement), which is where I would like to see the stock. However, I believe Target is doing too many things right so like Dick’s, I would buy half prior to earnings and the rest after, as long as the guidance is good.

Retail earnings are in full swing this week. If you had to choose two for a long-term investment, Home Depot rules all, followed closely by Target and TJX. If we get positive news from the above companies, expect the markets to push higher. For the broader market, keep the key technical levels top of mind with the S&P 500 at 2073, IBB at 364 and the IWM at 120.

My current positions: Long Gilead Sciences (GILD), Starbucks (SBUX), Facebook (FB), Wells Fargo (WFC), Time Warner (TWX), NXP Semiconductors (NXPI), Darden Restaurants (DRI), Celgene (CELG), Mobileye (MBLY), Jack In The Box (JACK), Under Armour (UA), United Rentals (URI), Regeneron (REGN), Apple (AAPL), Southwest Airlines (LUV), Dow Chemical (DOW), L Brands (LB), Costco (COST), Amgen (AMGN), Home Depot (HD), Allergan (AGN), FireEye (FEYE), Humana (HUM), GoPro (GPRO), Skyworks Solutions (SWKS), Disney (DIS) and long LAS VEGAS SANDS (LVS) CALLS.

Jeff Lewison