Shares of JCPenney (NYSE: JCP) tumbled on Friday after the company reported a decline of more than 50% in third quarter profits, driven largely by extremely weak consumer spending.
Friday also marked the launch of the company's 2008 Christmas Campaign, which will aim to convince consumers that JCPenney offers products similar to those found at higher-end stores at much better prices. Recognizing that the market is weak and that the company's core value-oriented consumers are likely to be stingy, JCPenney is hoping to profit from the trading-down of people who would normally shop at stores like Macy's (NYSE: M) but are feelings strapped.
"It's going to be a real dogfight out there for the customer's dollar," chief marketing officer Mike Boylson told The Wall Street Journal (subscription required). "We need to take market share from somebody else."
Aeropostale (NYSE: ARO) has succeeded in doing just that in the teen apparel market, with its lower price points luring in former Abercrombie & Fitch (NYSE: ANF) loyalists.
The problem may be that the weak economy will lead to a highly promotional environment at all retailers, and the prestige associated brands like Macy's and Bloomingdales combined with big sales could prevent JCPenney from making inroads.
Jefferies upgraded shares of Air Products & Chemicals, Inc. (NYSE: APD) to Buy from Hold and raised its target to $79 from $63 on valuation as they believe the stock is oversold at current levels and that the company is well positioned to outperform in a slowing demand environment.
Goldman upgraded the U.S. Insurance Brokers sector to Attractive from Cautious and upgraded AON Corporation (NYSE: AOC) and Marsh & McLennan Companies, Inc. (NYSE: MMC) to Buy from Neutral.
Covanta Holding Corporation (NYSE: CVA) was upgraded to Outperform from Perform at Oppenheimer. The firm recommends buying shares because they believe that its business model is defensive and its long-term contracts provide stability.
First Solar, Inc. (NASDAQ: FSLR) was raised to Market Perform from Underperform at Friedman Billings.
Baird upgraded IMS Health, Inc. (NYSE: RX) to Outperform from Neutral.
The Progressive Corporation (NYSE: PGR) was lifted to Neutral from Sell at UBS.
Aeropostale (NYSE: ARO), a retailer whose colleagues include Abercrombie & Fitch (NYSE: ANF), Pacific Sunwear of California (NASDAQ: PSUN) and Gap (NYSE: GPS), issued its Q2 report on Thursday. The stock didn't do much after the numbers were made public despite reporting a very nice 21% increase in sales during Q2, and a whopping 63% jump in earnings per diluted share to 31 cents. Why such a blasé reaction? Well, the retailer was only able to match the expectations of Wall Street analysts, so that might offer some justification for the lack of a decisive bid.
I felt the same way after reading Aeropostale's earnings release as I did after perusing the stats behind GameStop's (NYSE: GME) recent quarter, thinking the company deserved at least a little excitement, especially when one considers that last year at this time, the mall chain saw a 4% contraction in same-store sales. Of course, there is one understandable difference between the GameStop situation and the Aeropostale scenario. GameStop's stock wasn't trading near a 52-week high, and Aeropostale's shares are. So, perhaps the market is perceiving that a lot of the good news is already priced in.
Aeropostale has done well this year. Its stock is up over 28%. Should that concern potential investors? Perhaps. After all, this is a mall retailer based on fashion and investors must consider that Aeropostale's current hot streak could cool. If that happens, the stock might end up retreating back to the lower end of its 52-week range. While there are any signs that such a retreat will happen, I only want to throw into the discussion the concept of fickleness among the youth.
If you really like Aeropostale and want to buy its stock, it might not be so bad to wait for a better price, in my opinion, to allow at least a little margin for error.
Disclosure: I don't own any company mentioned; positions can change at any time.
Rival home improvement chains Home Depot Inc. (NYSE: HD) and Lowe's Companies Inc. (NYSE: LOW) are scheduled to report quarterly results this week. Not surprisingly, given the ongoing housing slump, analysts surveyed by Thomson Financial on average expect both companies to post earnings lower than in the same period a year ago. For Home Depot, that's 61 cents per share, down 20.8%, and for Lowe's, 56 cents per share, down 16.4%. Meanwhile, cabinet maker American Woodmark Corp. (NASDAQ: AMWD), for whom Home Depot and Lowe's are major distributors, is also expected to report lower earnings: 11 cents per share, down 67.6%.
The presidential campaigns have prompted much discussion of energy policy and alternative energy sources. Some solar-energy-related concerns are scheduled to report this week, and expectations seem to be high. Trina Solar Ltd. (NYSE: TSL) is expected to report 81 cents per share earnings, up 67.9%; ReneSola Ltd. (NYSE: SOL) is expected to post earnings of 32 cents per share, up 62.5%; and Suntech Power Holdings Co. (NYSE: STP) is expected to have earnings of 32 cents per share, up 21.9%. Even China Sunergy Co. Ltd. (NASDAQ: CSUN) is expected to have swung to a profit of 3 cents per share, from a per-share loss of 14 cents a year ago.
Ubiquitous mall retailers Gap Inc. (NYSE: GPS) and Aeropostale Inc. (NYSE: ARO) both reported Thursday that their profits increased in the first quarter despite the weak economy.
San Francisco-based Gap said it boosted its earnings by tightly managing costs and inventory. Profit for the quarter ended May 3 rose 40% to $249 million, or 34 cents per share, from $178 million, or 22 cents per share, in the same period last year. However, revenue fell 5% to $3.38 billion as same-store sales fell 11%.
Analysts polled by Thomson Financial had predicted a profit of 30 cents per share on revenue of $3.42 billion.
The Gap reaffirmed its 2008 guidance of earnings between $1.20 and $1.27 per share, while analysts expect $1.25 per share.
Shares rose 22 cents, or 1.2%, to close at $18.29 Thursday, and climbed an additional 31 cents in after-hours trading.
If you were paying close attention to this column last week, you would have sidestepped some of the pain and misery investors in many of the stocks discussed have suffered lately. Of late, we have seen the general direction of the markets turn positive, even in the face of news to the contrary.
Perhaps it is because investors have an appetite for stocks, since there seems to be few investment alternatives. Real estate is off limits and the yield on bonds and other fixed-income investments is pathetically low.
The theme for the week ahead is SMOOTH SAILING. In this week's column, we delve into some stocks that will be announcing earnings, and that may benefit from the changing tide of investor sentiment. To be sure, there will be several areas of choppiness as we continue to be bombarded by the stormy realities of a turbulent economy.
Monday, May 19
The chart for Campbell Soup (NYSE: CPB) looks M'm M'm good. Sporting a smooth line with nary a ripple over the past 12 months, management has done a great job at keeping both company earnings and share price up, even in the face of significant food inflation. While shares have been condensing during the past few months, recently they have been rising with a series of higher highs and higher lows. Be on the outlook for earnings of 44 cents per share on revenue expectations of $1.89 billion. Now that I think of it. That's a lot of soup wrapped in tin-plated steel -- one of many materials that has seen its price almost double in the past six months.
Abercrombie & Fitch Co. (NYSE: ANF) shares opened lower this morning after the retailer posted a 10% drop in March same-store sales. Analysts had been expecting a drop of 4.5%. However, the stock is trading higher now as positive results from other retail outlets like Aeropostale (NYSE: ARO) have encouraged the markets. If you think that the stock won't fall by too much in the coming months, then now could be a good time to look at a bullish hedged trade on ANF.
After hitting a one-year high of $85.77 in October, the stock hit a one-year low of $66.05 in January. ANF opened this morning at $72.65. So far today the stock has hit a low of $72.36 and a high of $75.89. As of 12:50, ANF is trading at $74.81, up 0.79 (1.1%). The chart for ANF looks bearish and steady, while S&P gives the stock its highest 5 STARS (out of 5) strong buy rating.
For a bullish hedged play on this stock, I would consider a May bull-put credit spread below the $65 range. A bull-put credit spread is an options position that combines the purchase and sale of put options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. For this particular trade, we will make a 9.9% return in just five weeks as long as ANF is above $65 at May expiration. Abercrombie would have to fall by more than 13% before we would start to lose money. Learn more about this type of trade here.
MOST NOTEWORTHY: Thornburg Mortgage, Keryx Biopharma and Aeropostale were today's noteworthy downgrades:
Jefferies downgraded shares of Thornburg Mortgage (NYSE: TMA) to Underperform from Hold after the company said it is unable to meet margin calls despite asset sales and will restate 2007 earnings.
Keryx Biopharma (NASDAQ: KERX) was downgraded to Neutral from Buy at Merrill, to Neutral from Overweight at JP Morgan, to Underperform from Market Perform at Rodman & Renshaw, to Hold from Buy at Jefferies and to Underperform from Outperform at Bear Stearns after the company announced the Sulonex SUN-MICRO Phase 3 trial failed to meet the primary endpoint.
Citigroup lowered Aeropostale (NYSE: ARO) to Sell from Hold as they believe inventory levels are building and that there is downside risk to Q1 estimates.
Amid mounting criticism for its role in the subprime crisis, McGraw Hill Companies Inc (NYSE: MHP) replaced Kathleen Corbet, the president of Standard & Poors, with Deven Sharma, a McGraw Hill senior VP who has been with S&P since the end of last year, reported the Wall Street Journal.
Barron's Online's "Inside Scoop" column reported that Aeropostale Inc (NYSE: ARO) CFO Michael Cunningham sold $2.1M in stock Monday at an average price of $22.43 per share, according to SEC data.
OTHER PAPERS:
Indian IT outsourcing companies Infosys Technologies (NASDAQ: INFY) and Wipro Limited (NYSE: WIT) have reportedly both shown interest in buying out the US-based high-end analytics company MarketRx, which is believed to be worth between $150M and $160M, reported the Economic Times.
MOST NOTEWORTHY: AU Optronics (AUO), RightNow Tech (RNOW), Alaska Air (ALK), Nordstrom (JWN), Gap (GPS) and Old Dominion Freight Line (ODFL) were today's noteworthy upgrades:
HSBC upgraded AU Optronics (NYSE: AUO) to Overweight from Neutral following the company's Q2 results.
Jefferies raised RightNow Technology (NASDAQ: RNOW) to Buy from Hold, believing low expectations have created a buying opportunity and that fundamentals remain intact.
JP Morgan upgraded shares of Alaska Air (NYSE: ALK) to Overweight from Netural on valuation.
Citigroup upgraded Nordstrom (NYSE: JWN) to Buy from Hold on valuation; they consider the recent pullback a buying opportunity.
Citigroup upgraded Gap (NYSE: GPS) to Buy from Hold from valuation and expects for better execution and cost savings in 2008 under the new CEO.
MOST NOTEWORTHY: McAfee (MFE), Wabtec Corp (WAB), Pacific Sunwear (PSUN), Aeropostale (ARO) and Amdocs (DOX) were today's noteworthy initiations:
McAfee Inc (NYSE: MFE) was initiated with an Accumulate rating at ThinkEquity, as the firm is positive on the company's competitive positioning in security, refocused business and streamlined operations.
JP Morgan initiated shares of Wabtec Corp (NYSE: WAB) with an Overweight rating, as the firm believes Wabtec's strong market presence should support 22% and 12% EPS growth in 2007 and 2008.
Nollenberger feels that the core PacSun concept is challenged to re-establish a niche in the competitive teen marketplace, and initiated shares of Pacific Sunwear (NASDAQ: PSUN) with a Neutral rating and $22 target.
Nollenberger also initiated shares of Aeropostale (NYSE: AEO) with a Buy rating and $49 target and recommends buying the stock into back to school.
Cantor initiated shares of Amdocs (NYSE: DOX) with a Hold rating and $37 target on valuation...
Upscale lifestyle products company Urban Outfitters, Inc. (NASDAQ: URBN) reversed the trend among its competitors and posted good 1Q earnings. Total sales for 1Q 2007 increased 16% to $314.5 million, which is a new record. Earnings increased a big 45% to $29.4 million, which works out to diluted EPS $0.17. So far so good, but ... None of Urban Outfitters three current brands posted remarkable increases. Anthropologie sales increased 2%, Free People increased sales by 8%, while its main brand, Urban Outfitters, declined 5%. The big sales increases came from a 30% increase in internet sales, and 12% increase at Free People Wholesale.
If direct-to-consumer sales are the hot ticket, then why did Urban Outfitters, Inc. open six new expensive stores during 1Q, four Urban Outfitters and two Anthropologie? Why does the company plan to open an additional 32 expensive locations during the coming year? Gross profit margins remained essentially flat, but the cost of inventory increased 19% because the new stores have to be stocked. Why not build a more sophisticated internet presence?
Urban Outfitters, Inc. plans to launch a fourth brand in early 2008. This brand will be primarily an upscale home and garden brand. It is unclear how many, if any, of the 32 new stores will belong to this as yet unnamed brand.
Urban Outfitters, Inc. was helped this quarter by one-time federal tax incentives that contributed $0.03 per share to earnings by reducing the corporate tax rate to 22.3%. The rate will return to its normal 36.2% in FY 2008. Still, Urban Outfitters is a bright spot amongst its competitors. American Eagle Outfitters' profits are below expectations, and the stocks for Aeropostale, Pacific Sunwear, and Abercrombie & Fitch are all down. Shares of Urban Outfitters, Inc. closed recently at $25.51, up $0.14.
MOST NOTEWORTHY: GlaxoSmithKline plc (GSK), SanDisk Corp (SNDK), Lockheed Martin Corp (LMT) and aQuantive, Inc (AQNT) were today's noteworthy downgrades:
Deutsche Bank and ABN Amro cut GlaxoSmithKline (NYSE: GSK) to Hold from Buy following the New England Journal of Medicine warnings from Avandia.
Merrill Lynch cut SanDisk (NASDAQ: SNDK) to Neutral from Buy due to concerns that oversupply in the industry will extend through next quarter.
Cowen downgraded shares of Lockheed Martin (NYSE: LMT) to Neutral from Outperform based on slower 2007-2008 EPS growth and less cash redeployment upside than General Dynamics Corp (GD) and Raytheon Co (RTN).
UBS downgraded aQuantive (NASDAQ: AQNT) to Neutral from Buy and RBC Capital cut shares to Sector Perform from Outperform after the Microsoft (MSFT) acquisition...
OTHER DOWNGRADES:
Piper Jaffray downgraded Cytyc Corp (NASDAQ: CYTC) To Market Perform from Outperform.
NetBank, Inc (NASDAQ: NTBK) was downgraded to Underperform from Market Perform at Friedman Billings.
Merrill Lynch downgraded shares of Aeropostale, Inc (NYSE: ARO) to Neutral from Buy.
Shares of JCPenney (NYSE: JCP) tumbled on Friday after the company reported a decline of more than 50% in third quarter profits, driven largely by extremely weak consumer spending..gif){kind=logo}
Rival home improvement chains 
Ubiquitous mall retailers 
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GM and Ford ready weak pitches for taxpayer bucks
Cramer on BloggingStocks: A troika of opportunity and trouble 
Before the bell: Wall Street headed higher; automakers, retailers in focus
