With the S&P 500 (NYSEARCA:SPY) teasing at another all-time record close, many eyes are now focused on retail stocks.
After all, this is where the economic rubber meets the road. All the talk about improvements in gross domestic product and a reduction in workers applying for unemployment benefits can be summarized in one question.
Are more Americans buying more stuff?
Unfortunately, the numbers from the markets reflect a different reality. Several major retail stocks have been laggards in the first quarter of this year, including Gap Inc. (NYSE:GPS) and Nordstrom, Inc. (NYSE:JWN). These two retail stocks have combined for an average year-to-date loss of 5.93%.
Fundamentally, retail sales as a whole have been lackluster, particularly due to slow winter sales. As such, expectations on Wall Street are cautiously low. The contrarian argument is that, given the reduced standards associated with the industry, bullish investors are hoping that any positive news will spark a trading opportunity in retail stocks.
One thing is certain: There will be keen interest in retail as the first of the major department store names are set to release their earnings result.
Let’s take a look at three of the contenders.
J C Penney Company Inc (JCP)
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Noting the volatile price range between $6 at the low to $11 at the high over the past 12 months, Grom also pointed to historically mediocre earnings performances and disruptive management changes as reasons why it is “hard to get involved” in JCP.
The facts confirm these apprehensions, making JCP one of the trickiest retail stocks to trade. Since May of 2012, JCP has beat earnings expectations only four times, all instances occurring last year at arguably the height of the retail company’s restructuring efforts.
Recently, however, earnings momentum is waning, with JCP missing its fourth-quarter 2014 target, while Sterne Agee believes that the upcoming report — scheduled to be released on May 13 — will post a loss slightly better than the expected earnings per share loss of 79 cents.
Additionally, over the past 12 earnings report, JCP stock has yielded positive returns only three times in the two months following the month of an earnings release. This statistic only solidifies how volatile and inconsistent the price range for this retail stock can be.
While it’s definitely possible to make money off of JCP’s market fluctuations, in the long run, there are more questions than answers.
Macy’s, Inc. (M)
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Nevertheless, in recent times, Macy’s stock has suffered intense — some would say desperate — competition from retailers anxious for survival. As a result, the company has had to resort to aggressive pricing to keep up with the competition, bringing to question how it will do when its first-quarter results are released this Wednesday.
From a historical perspective, Macy’s earnings performance is rather enviable among retail stocks. Over the past 12 quarterly reports, the company has beat expectations 83% of the time and is currently riding a two-hit winning streak. Of the 12 reports, half have resulted in positive returns for Macy’s stock two months after the earnings release, for an average gain of approximately 3.14%.
Macy’s stock also benefits from statistical tailwinds. The last 90 days of trading have yielded a net performance rate of 1.32%. Under similar performances in the past, Macy’s stock has moved up within the next three months 80% of the time, with average returns of 15.4%. Of the 20% of the time the market goes sour, average losses amount to -8.7%. Steep, yes, but the magnitude of potential reward certainly outweighs the risk, something that cannot be said for volatile stocks like JCP.
Overall, there are some concerns with how Macy’s will adjust to the ultra-competitive retail landscape but the evidence indicates that there’s still more room to run.
Dillard’s, Inc. (DDS)
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But actual market strength — what matters most for shareholders — has been somewhat disappointing for DDS stock. Although shares are up 2% year-to-date, DDS has lost 10% of value since peaking last month, a point loosely referenced by CNBC titan Jim Cramer. The Mad Money host believes the recent selloff is a “godsend,” but what do the facts say?
Historically, the earnings performance for DDS is representative of many retail stocks: middling, choppy, and strained. In the past 12 earnings reports, 67% have beaten Wall Street consensus estimates. However, of the past six, only half have exceeded expectations. Since November of 2013, the average performance of DDS stock two months after an earnings release is approximately -0.46%.
Investors hoping for a quick pop in DDS once its first-quarter results are released are fighting against statistical trends. Its three-month average performance of -0.02% suggests only a 53% chance that DDS will move higher over the next 90 days. Forecast average returns are fairly high at nearly 14% but the risk is equally high as well, with a potential loss of -12.3% should the bears take control of the markets.
Given the current tenuous nature of retail stocks, DDS may have more downside to suffer before it becomes a buying opportunity.
As of this writing, Josh Enomoto is short JCP.
