3 Red-Hot Retailers That Could Get the Earnings Hose

by Alyssa Oursler | May 13, 2013 1:59 pm

Between unseasonably cold weather, new taxes and higher gasoline prices earlier this year, consumer spending concerns have been fluttering around for most of 2013.

This morning, however, the Commerce Department reported that retail sales gained last month, even as economists were expecting yet another drop. As a result of that and other pieces of data, sentiment is increasingly leaning toward the thought that consumers are faring just fine.

Of course, a few retail names have been chugging along through thick and thin this year. Specifically, JCPenney (NYSE:JCP[1]), Zumiez (NASDAQ:ZUMZ[2]) and Gap (NYSE:GPS[3]) are all running hot — and with all three slated to report earnings in the next week or so, all three warrant a closer look.

JCPenney

JCPenney has been looking awfully good lately.

No, I’m not kidding.

JCPenney was ahead in the mid-single digits Monday morning to put the department store stock’s climb to more than 25% in the past month — almost 10 times better than the S&P 500.

ycharts chart 7 3 Red Hot Retailers That Could Get the Earnings Hose

So why is the flailing retailer’s stock so jumpy? It’s anyone’s guess, though you could point to the recent ousting of CEO Ron Johnson, the news that George Soros has nearly a 8% stake in the company[4], the retailer’s apology campaign[5] or maybe just the idea that the worst is behind us.

Regardless, things still aren’t pretty at JCP. Despite the recent run, JCPenney’s stock remains down 7% year-to-date and 50% in the past year. It recently reported a 17% drop in Q1 same-store sales[6], while analyst expectations for how bad Q1 earnings will be have gradually gotten worse. Three months ago, expectations were for a loss of 29 cents. Now, that has widened to a loss of 86 cents per share — an EPS that would be nearly 250% worse than the year-ago period on a 15% drop in revenue.

Of course, the fact that JCPenney has set a precedent not just of posting losses, but wider-than-expected losses, might actually be a good thing. JCP missed earnings dramatically the past four quarters, posting worse-than-expected losses by margins of $1.77, 86 cents, 12 cents and 14 cents. Simply coming in line with low expectations when it reports Thursday could be enough to keep JCP shareholders from storming the exits.

Personally, though, I’d still steer clear of this spectacle. Any reminder that this retailer is a hot mess — like its upcoming earnings report — could be a catalyst for profit-taking.

Zumiez

Teen retailer Zumiez has been riding the momentum of last week’s strong same-store sales report heading into its Thursday earnings call. Investors piled in last week as the company posted comps of 4.6%, while only a 4.1% gain was expected.

ycharts chart 4 3 Red Hot Retailers That Could Get the Earnings Hose

Still, sales are nothing if they don’t translate to profits … and at this point, earnings for the current quarter are expected to tumble 14%, even as revenue is expected to improve by nearly the same amount. And while the current EPS estimate of 12 cents is higher than the estimate for a month ago, it’s also lower than the prediction three months ago.

That’s not promising that those mixed signals come amid a sparkling recent spate of big earnings beats, including 27% and 31% quarterly surprises in the first half of 2012. And it’s even more troubling when you consider that ZUMZ is trading at a fair if not slightly inflated 17 times forward earnings and 20% higher than analysts’ median target.

I wouldn’t be surprised to see Wall Street flee this overbought stock on anything short of a spectacular beat, and that’s unlikely.

Gap

Gap seemed out of fashion not so long ago, but it’s pulling off one heckuva comeback now. GPS has gained 7% in the past month, 32% since Jan. 1 and 46% in the past 52 weeks — all three of those numbers roughly double the broader market.

ycharts chart 5 3 Red Hot Retailers That Could Get the Earnings Hose

That run isn’t without merit. Gap has met or beaten earnings estimates in each of the past four quarters. Plus, the company reported a 7% increase in April same-store sales last week — around a percentage point better than expected — while also raising its current EPS guidance to a range of 68 cents to 69 cents.

Analysts surveyed by Yahoo Finance have only been expecting 57 cents per share — itself a 21% year-over-year improvement, and higher than estimates a few months back — when Gap reports next Thursday. Revenue also is slated to grow around 5% this quarter and next.

However, bullish sentiment has pushed Gap’s shares up to decade-long highs at $40 — a price that’s right in line with analysts’ mean and median targets — and it’s trading at 14 times forward earnings. At least some sort of pullback seems in order.

Given that Gap is as much of a lock as you could want to clear the high bar it has set for itself, anything short of eye-popping could be trouble.

As of this writing, Alyssa Oursler did not own a position in any of the aforementioned securities.

Endnotes:
  1. JCP: http://studio-5.financialcontent.com/investplace/quote?Symbol=JCP
  2. ZUMZ: http://studio-5.financialcontent.com/investplace/quote?Symbol=ZUMZ
  3. GPS: http://studio-5.financialcontent.com/investplace/quote?Symbol=GPS
  4. George Soros has nearly a 8% stake in the company: http://money.cnn.com/2013/04/25/news/companies/soros-jc-penney/index.html
  5. retailer’s apology campaign: http://investorplace.com/2013/05/jcpenney-begs-forgiveness-in-tv-ad-apology/
  6. 17% drop in Q1 same-store sales: http://investorplace.com/2013/05/jcpenney-same-store-sales-sink-6-stocks-in-60-seconds/

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