Why Specialty Retail Can’t Speak for the Sector

Stocks like LULU and FIVE are called 'specialty' for a reason

   

Forget Father’s Day or el derecho. The star of this week is the retail sector.

Between a string of specialty retail reports and this morning’s release of the much-anticipated May retail data, it seems everyone is tuned into just how well consumer spending weathered any spring headwinds.

But so far, specialty retailers have posted a bit of a mixed bag.

  • Francesca’s (FRAN) missed on revenue and posted a subpar forecast last week, resulting in a tumble that makes its full-year loss over the past month an ugly 13%.
  • Discount retailer Five Below (FIVE) swung to a profit and beat on the top and bottom lines.
  • Luxury name Prada (PRDSY) showed “cooling growth” and shed around 2% this week.
  • Ulta Salon (ULTA) enjoyed a double-digit spike Wednesday after jumping over the bar set by analysts.
  • Lululemon (LULU) beat expectations on the top and bottom lines, but still has lost 19% since Monday (more on that in a second).

Good news, though: You really don’t have to worry.

To start, May retail sales were nice and sunny, tallying the largest improvement in three months, beating analyst expectations and leading to the usual cheering of low interest rates and the “wealth effect.”

Beyond that, earnings results from specialty retailers hardly provide a pulse of the broader economy or consumer spending habits.

For one, the stores have niche, narrow audiences, hence the term “specialty” retail. Lululemon and Prada target high-end shoppers — with many of the biggest spenders for the latter coming from overseas. That “cooling” headline mentioned for Prada, for example, partly was on the shoulders of Italian customers. Because of such prosperity and variety, they tend to be less affected by macro factors like the payroll tax cut that some suggest Walmart (WMT) suffered from.

Five Below, on the other hand, sells plastic bedazzled phone cases, discounted nail polish and tacky holiday accessories. The hordes of teens that flock to the store are also far from representative of the entire shopping population, and thus the broader economy. I guess their allowance might go up if Mom and Dad find themselves earning more and worth more thanks to a strengthening economy, but it’s hardly the same correlation more traditional retailers like Target (TGT) enjoy.

Then there’s Lululemon, which sold off in large part thanks to news from the corner office. Christine Day, CEO of the maker of yoga pants, announced that she will step down once the company finds a successor. While such a blip could happen to any retailer, many speculate that another reason investors got so jittery is because Lululemon’s premium, at the time, was dependent on eye-popping growth.

Regardless of what moved the stock, Lululemon’s growth depends more on the current yoga fad than it does consumer spending.

Ulta relies much less on a fad. Still, its growth rates — which largely determine investor sentiment — don’t directly mean consumers are letting loose their purse strings. Instead, it might be that Ulta started its huge expansion a few years before the recession and has already doubled its count since 2008.

At some point, saturation will slow things down, not necessarily the macro environment. In fact, the company’s slipping same-store sales — which fell from over 10% to under 7% in the last quarter — might be proof we are already nearing that point.

You get the picture. Oftentimes, investors in specialty retail names are looking for break-neck growth … and that growth isn’t necessarily driven by consumer confidence or sentiment regarding the broader retail sector.

The bottom line: Don’t run screaming from the sector just because investors in these specialty stocks have the jitters.

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


Article printed from InvestorPlace Media, http://investorplace.com/2013/06/why-specialty-retail-cant-speak-for-the-sector/.

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