fwiw.......3 Stock Picks: COST, ANF, KEY 06/04 12:30 PM
Costco Sales Down for Third Straight Month
Investors backed off Costco () shares after the discount retailer reported a drop in May same-store sales. The stock dropped 3.6% during early trading Thursday.
Costco experienced a 1% decline in same-store sales, mainly because of lower prices at the pump that lead to a 7% decrease in gasoline revenues. It's the third consecutive monthly sales drop for the Seattle area-headquartered chain, which is getting hit hard by high unemployment in key markets such as California and Florida.
The sales drop and subsequent share selloff is part of investors’ slow adjustment to the outlook for the entire retail sector, which remains weak and troubled, despite recent surveys showing increased consumer confidence. "A lot of this is coming from significant cost cuts and store closures," says Brian Sozzi, an analyst at Wall Street Strategies. "I sense this divergence in expectations. I'm much more concerned with the second half of the year."
Costco missed quarterly Street estimates earlier in the week. It reported profits of 52 cents a share, three cents short of expectations.
Dan Geiman, an analyst at McAdams Weight Ragen, said gas price moves, reduced spending and also Costco's product mix will continue to weigh heavily. "We don't have a tremendous degree of confidence in our... projections," he wrote Tuesday.
Sozzi says Costco, which already operates on "razor thin" margins, is losing market share among lower-income customers, more of whom are now out of work and shopping at dollar stores on a day-to-day basis.
"If you're hard up for money, you don't shell out for bulk purchases and you don't renew Costco's $100 membership fee," he says. "Many [analysts] are missing the human aspect to the whole thing. Until you start to see unemployment come down and normalize, you won't start to see normalization in spending."
Bottom Line: Buy
Discounters will still be the first part of the retail sector to see a pickup when consumers start spending money, but investors need to brace for the idea this may not happen until 2010.
Abercrombie Hurt by Lack of Discounting
Abercrombie & Fitch (ANF:$27.57,00$-4.13,00-13.03%) () shares fell out of fashion Thursday after the teen-oriented retailer reported weaker-than-expected sales results for May.
The New Albany, Ohio-headquartered company said same-store sales dropped 28% the past month, worse than Street estimates of a 24% decline.
Abercrombie is in a particularly tough spot, because it's resisted discounting its merchandise until the last few months, and its customer base has quickly shifted to spending less money.
"Abercrombie still has higher price points and teenagers are still looking for value at the mall," says Atlantic Equities analyst Daniel Nedialkova. "Especially as they head into summer and they aren't sure if they have part-time jobs. If they have less money at their disposal, they'll just go somewhere cheaper, like Aeropostale (ARO:$36.41,00$-0.20,00-0.55%) () and American Eagle (), both of which had better results."
The company's Hollister chain saw the biggest decline, dipping 32% from a year ago.
Linda Tsai, an analyst at MKM Partners, wrote in a Tuesday retail sector preview note that Abercrombie was particularly vulnerable because its merchandise is still too expensive, meaning "margins are likely to remain under pressure until ongoing sustainable fashion improvements and more reasonable price points result in higher levels of full-priced selling."
The move by teens to value is a shift that could have longer-term implications for Abercrombie, says Nedialkova. "You're never going to come into an Abercrombie store and see signs for 70% off," she says. "They don't want to become that kind of brand."
Bottom Line: Hold
Expectations remain out of sync for this company, but selling into weakness is the worst move an unhappy shareholder can make.
KeyCorp in Share Swap
Another bank got the investor seal of approval Thursday as KeyCorp (KEY:$5.49,00$0.89,0019.35%) () announced plans to swap $1.3 billion of common stock for convertible preferred stock.
As part of its “stress test†the Treasury Department reported last month that the Cleveland-headquartered regional bank would need to raise $1.8 billion to be adequately capitalized for a protracted economic downturn. The bank said a successful transaction "will strengthen KeyCorp's (KEY:$5.49,00$0.89,0019.35%) capital framework by improving its Tier 1 common equity ratio," as required by the government.
Wall Street approved of the Wednesday announcement, which differs from recent moves by other financial institutions that have simply issued new shares to raise capital. KeyCorp (KEY:$5.49,00$0.89,0019.35%) has already done that, along with American Express (AXP:$25.14,00$0.66,002.70%) (), PNC Financial Services (PNC:$43.57,00$3.24,008.03%) (), Wells Fargo (WFC:$24.74,00$0.61,002.53%) () and Morgan Stanley (MS:$31.29,00$1.57,005.28%) ().
Oppeheimer & Co. analyst Terry McEvoy said the plan removes an overhang which had been hurting the stock, but that its prospects are limited beyond the success of the capital structure re-jiggering. "We see little pre-tax, pre-provision earnings power over the near-to-mid term," he wrote Wednesday.
The success of capital-raising for most banks won't affect many of the larger issues that still plague the financial sector, but Key has at least answered a basic question, said Jeff Davis, an analyst with Howe Barnes Hoefer & Arnett.
"Credit rating agencies and apparently banking regulators take a dim view of credit quality prospects in coming quarters," he wrote. "Nevertheless, KEY should have enough capital to survive."
Bottom Line: Sell
This could be the short-term payoff for fast money investors, and the entire sector remains a big risk for small investors.
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