Volatility Spreads to Retail as Bears Multiply

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Extreme gloom is spreading from technology to retailers.

Target (TGT), Lowe’s (LOW), TJX (TJX), Kohl’s (KSS) and L Brands (LB) are all dropping today. Some missed earnings, others missed on same-store sales. Regardless, investors refused to give any the benefit of the doubt.

TGT’s the biggest decliner, sliding more than 10 percent in the pre-market after narrower margins caused profit to lag estimates. Comparable sales rose slightly less than expected, not exactly what you want to see after hyping a major overhaul of stores.

(Comparable, “comps” or “same-store” sales show revenue growth at locations open at a least a year. They’re a key metric of core performance for retailers because they exclude the impact of closed or newly opened stores.)

LOW’s comps missed by a country mile: +1.5 percent versus the +2.9 percent consensus number. Profit and revenue beat but management cited problems with merchandise and broader strategy. That sent the home-improvement chain down 7 percent, near its trough from the spring.

TJX, the parent of stores like Marshall’s and TJ Maxx, was perhaps the biggest surprise because it had executed flawlessly for so long. This quarter, however, higher costs took a bite out of earnings and forward guidance. No one seemed to care about its same-store sales beat.

No one seemed to care about KSS in general. The middle-American department store operator surpassed estimates on both earnings and revenue. So what? The stock cratered 11 percent. Just imagine what would have happened if they had missed.

LB dropped 9 percent for no particularly good reason. The owner of Victoria’s Secret and Bath & Body Works pretty much hit the strong guidance it provided back on November 8. No one cared.

All the negativity in retail represents a sharp pivot from last month, when retailers briefly tried to bounce ahead of their numbers. The big question now facing investors is whether to blame the economy or something deeper in the sector.

These numbers suggest the problem may be found within retail itself, rather than the economy. After all, most of these companies, including Wal-Mart Stores (WMT), beat on overall revenue. Their troubles are further down the income statement on the cost lines.

Taking a bigger step back, let’s not forget this industry has endured a long-term shakeout from both the spread of e-commerce and a demographic shift to smaller households. Thousands of locations have closed and dozens of merchants have gone bankrupt.

In conclusion, business models that worked for a century remain under pressure. Investors may need to consider the possibility that the retail apocalypse might not be over yet.

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David Russell is VP of Content Strategy at TradeStation. Drawing on nearly two decades of experience as a financial journalist and analyst, his background includes equities, emerging markets, fixed-income and derivatives. He previously worked at Bloomberg News, CNBC and E*TRADE Financial. Russell systematically reviews countless global financial headlines and indicators in search of broad tradable trends that present opportunities repeatedly over time. Customers can expect him to keep them appraised of sector leadership, relative strength and the big stories – especially those overlooked by other commentators. He’s also a big fan of generating leverage with options to limit capital at risk.