Retail Earnings Analysis: The Good And The Bad

By James Brumley | August 24, 2009 AAA

Earnings news from retailers continues to roll in, and it continues to be a mixed bag. However, with some digging, the winners and losers become pretty evident. Here's the latest batch.

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GameStop Corp. (NYSE:GME)
Though almost always recession-existent, this recession's lingered long enough to finally chip away at the computer and video gaming industry as well. GameStop - a retailer of console games and accessories - said its second-quarter sales were lower by 3.7%. Earnings sank 47%. But it gets worse, as GameStop also cut its Q3 and full-year outlook. Before anybody dumps their GME holdings though, a little perspective may be in order.

Yes, sales were down compared to Q2 of last year. However, GameStop's best second quarter ever was Q2 of 2008. The second best Q2? You guessed it, the second quarter of 2009. So, it may be that the comparison is unfairly high. Bear in mind, the gaming market saw a wave of blockbuster titles last summer, like Guitar Hero, Madden NFL 09, Tiger Woods PGA Tour 09 and Star Wars: The Force Unleashed, just to name a few. Not that the absence of any red-hot titles this summer makes it any easier to watch your stock sink, but the next wave of mega-hit games is a matter of when, not a matter of if. (learn how to create your own investing plan, check out our Stock Picking Strategies Tutorial.)

Ross Stores Inc. (Nasdaq:ROST)
Whatever Ross Stores did last quarter, other retailers should take note - earnings were up 45%. Moreover, Ross didn't have to cut the daylights out of expenses to offset dwindling revenue, as sales were actually up 7.8% and same-store sales were up 3%.

The key to putting a lot more on the bottom line from only cutting a little more on the top line, according to the company, was better inventory management in addition to cost cutting. I suspect the latter meant more than the former. As for the future, the pace of cost-cutting will have to slow down, since the stores don't run for free. The inventory-management agenda used in Q2 - which is clearly a key to growth - is going to be a focal point for the rest of the year at least. With an economic recovery slow in the making, discounted designer labels should remain in relative demand.

Stein Mart Inc. (Nasdaq:SMRT)
Last quarter, Stein Mart moved back into the black, thanks to the same tactic most other retailers have adopted over the last twelve months: countering big declines in sales with even-bigger cuts in costs. Earnings per share came in at four cents, versus a loss of 19 cents per share in Q2 of last year, even though revenue was off by 8%. The few analysts that follow the company only expected a two cent per-share loss last quarter, so the stock reached two-year highs due to the relatively positive news.

An optimistically-errant move? Maybe not. The company beat estimates in Q1 as well - by a lot. On the other hand, as was said about Ross Stores, expenses can't be cut indefinitely - the top line's got to go up sometime. Ross figured out how to do that in the discount-designer space, but Stein Mart still hasn't.

Following the stock's huge gains this year, the risk here seems far greater than the reward. Perhaps it's time to take some profits.

Stage Stores Inc. (NYSE:SSI)
Despite its "value" orientation, and its small-market niche, Q2 wasn't particularly kind to Stage Stores Inc. The company earnings fell 5.9% on an 8.3% dip in sales. However, per-share earnings of 24 cents were still better than the expected 23 cents.

Overall, it's not bad, and the stock edged slightly higher in the shadow of the news. But, it's not like the company did the stock any favors either - a loss is expected in the third quarter, and the stock's triple-digit rally this year may be intimidating to new buyers. (Predicting sales growth can be something of a black art - unless you ask the right questions, read Great Expectations: Forecasting Sales Growth.)

This may be a case where an overbought stock continues to appreciate in value. Stage Stores has been pretty clear about its plans to take over 30 to 35 now-empty Goody's stores in the foreseeable future. Opening these stores between the tail-end of a real estate bust and the early stages of an economic recovery could be more advantageous than the market realizes.

Bottom Line
This latest batch of earnings shows that the market's still undecided on the retail front. The companies discussed may still have some potential, but some might be already oversold.

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