During summers and winters in the early 1990s, I used to work for Williams-Sonoma (NYSE: WSM). In many ways, it was a dream job. I was paid to talk about cooking, learn about cooking and demonstrate cooking tools. One day, however, it occurred to me that, as much as I loved adopting a slightly condescending air when selling high-priced kitchen items, there really was a problem with the products that I was hawking. That afternoon, I talked an older woman into buying a "Tuscan grape drainer" as a gift for her niece's wedding. As the woman left the store, I realized that I had just convinced her to shell out $49.95 for what was, essentially, an earthenware bowl with holes in it and a couple of grape decals stuck on top.
As much as I like cooking, I have to acknowledge that nobody really needs a berry spoon, an asparagus peeler, a corn shucker, or most of the numerous other items that Williams-Sonoma hawks to its customers. The store is, in its own way, comparable to Sharper Image, Wilson's, or any number of the other specialty niche retailers that are finding it so difficult to weather the recession. Recently, in an attempt to lure shoppers into its premium stores, the retailer reduced prices massively, cutting into its profit margin and producing a 42% drop in fiscal first quarter profits.
As some analysts have noted, part of William-Sonoma's problem is that it is supporting an expensive catalog division that isn't really pulling its own weight. Moreover, as shipping prices continue to increase, it is likely that the company will see its catalog sales continue to decline. However, this is only half the issue: while most stores are feeling the recession pinch, it is hitting specialty retailers particularly hard. As Linens N' Things, Sharper Image, Wilson's Leather, and other companies could certainly attest, it's not a good time to specialize. Or, to put it another way, in this economic climate, people are using colanders to drain their grapes.
And who's next on the block? Well, have you taken a peek at the Gap (NYSE: GPS) recently?
When Gap Stores (NYSE: GPS) installed Glenn Murphy as its chairman and CEO, he was hailed as a savvy retailer whose marketing know-how would compensate for his lack of fashion industry experience. In its press release announcing the hiring, Gap declared that:
During his more than 20 years of experience in retail, Mr. Murphy successfully reinvigorated retail brands in the areas of food, health and beauty, and books. Most recently, at Shoppers Drug Mart, he differentiated the brand with new products and better service, and grew the company's market capitalization from about CAD $3 billion to over CAD $10 billion following its public offering . . .
Nearly 11 months into his tenure, the reinvigoration hasn't exactly happened: June comparable store sales fell 14% which, even allowing for the tough retail environment, isn't too impressive. But Murphy has made progress on other fronts and, so far, his main accomplishment has been cost-cutting.
In a move designed to make it easier and more appealing for consumers to shop at its websites, Gap (NYSE: GPS) is consolidating operations to allow for the purchase of clothing from Gap, Banana Republic, Old Navy and Piperlime using one shopping cart, paying one shipping fee. The Wall Street Journalreports that "By integrating the sites, the San Francisco-based company hopes to encourage shoppers to purchase products from more than one of its brands. Gap says about a third of its online orders are placed by customers who shopped at more than one of its Web sites in the past year."
Since this seems like an obvious way to spur sales growth, you have to wonder what took so long. One concern may be that keeping the sites separate kept the brands more distinct in the eyes of the consumer. Will having pricey Banana Republic merchandise in the same shopping cart as the more budget-oriented Old Navy detract from the value of that brand? It's possible. It may be why a more successful retailer like Abercrombie & Fitch (NYSE: ANF) has chosen to keep Hollister and its namesake brand entirely separate.
But with recent cost cuts aimed at improving profitability, Gap's recently-anointed CEO Glenn Murphy appears focused on improving performance now rather than building brands. With its shares trading at about half of where they were a decade ago, shareholders are probably ready for that.
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.
Gap Stores (NYSE: GPS), the parent company of Gap, Banana Republic and Old Navy, has been threatening to revitalize its U.S. stores for years. But with the stock down more than 50% since the dawn of the new millennium, the company has failed to restore its brands to relevance.
Now the company has announced that it will partner with Fiba Holdings A.S. to pen Gap and Banana Republic stores in Russia. Fiba will act as the franchise partner, just as it does for the company's stores in Turkey. Stores will be begin opening in time for the holidays.
Its possible that Gap will be able to regain some strength by focusing on international opportunities. Domestically, it's hard to think of a more passé fashion brand. But just as American baseball players on the decline often head to Japan and find success, once-iconic American fashion brands sometimes find new life overseas. Apax Partners' success with the Tommy Hilfiger brand is a prime example.
For now, though, I think investors should stay away from shares of Gap.
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.
PDUFA date for Bristol-Myers Squibb Co. (NYSE: BMY)'s supplemental Biologics License Application for Orencia for the treatment of Juvenile Rheumatoid Arthritis.
Alcoa Inc. (NYSE: AA) to report Q1 earnings; conference call at 5pm.
Tuesday, April 8
Chattem Inc. (NASDAQ: CHTT) to report Q1 earnings; conference call at 9:00am.
FOMC to release minutes of the March 18th meeting at 2:00pm.
MOST NOTEWORTHY: Credit Suisse, Bank of America and Bear Stearns were today's noteworthy downgrades:
UBS downgraded Credit Suisse (NYSE: CS) to Neutral from Buy to reflect the company's higher-than-expected write-downs in Q1.
Merrill cut Bank of America (NYSE: BAC) to Sell from Neutral and lowered their estimates to reflect a higher credit loss outlook as they now estimate Bank of America's loan provision will rise to $15B in 2008 from $8.4B in 2007.
Sandler O'Neil downgraded Bear Stearns (NYSE: BSC) to Sell from Hold citing share premium to deal value of $10.00.
OTHER DOWNGRADES:
Citigroup lowered Gap (NYSE: GPS) to Hold from Buy.
Tiffany & Co (NYSE: TIF) was downgraded to Perform from Outperform at Oppenheimer.
Here are highlights of some other earnings reports from Thursday:
Gap Inc. (NYSE: GPS) reported a 21% increase in its fourth-quarter profit year over year. The $265 million, or 35 cents per share, matched analysts' expectations. Revenue totaled $4.68 billion, down 5% from the previous year.
Kohls Corp. (NYSE: KSS) fourth-quarter profit fell about 15% year over year to $411.7 million, or $1.31 per share, just beating analysts' estimates. Sales rose less than 1% $5.49 billion, but same-store sales fell.
Novell Inc. (NASDAQ: NOVL) swung to a profit in its fiscal first quarter: $16.8 million, or 5 cents per share, matching expectations. Revenue rose to $230.9 million from $218.4 million a year ago.
Gap Inc. (NYSE: GPS) stock is trading lower with other retailers, on news that retail sales rose 3.6% in holiday shopping, on the lower end of analysts' expectations of 3.5-4.0%. It was the lowest holiday growth rate in the last five years. Same-store sales for the current month are also expected to come in just below meager projections, though a post-Christmas buying increase could help restore the shortfall. If you think this stock won't be rising too far in the coming months, then it could be a good time to look at a bearish hedged play on GPS.
After hitting a one-year low of $15.20 in August, the stock hit a one-year high of $22.00 on Monday, which it just peaked above this morning before falling off. This morning, GPS opened at $22.02. So far today the stock has hit a low of $21.17 and a high of $22.02. The chart for GPS looks bullish and steady, while S&P gives the stock a neutral 3 STARS (out of 5) hold rating.
For a bearish hedged play on this stock, I would consider a March bear-call credit spread above the $25 range. A bear-call credit spread is an options position that combines the purchase and sale of call 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 7.5% return in 3 months as long as GPS is below $25 at March expiration. Gap would have to rise by more than 18% before we would start to lose money.
GPS hasn't been above $22 at all in the past year and has shown resistance around $22 recently. This trade could be risky if the holiday season turns into a good one for retail, but with the economy slowing in the wake of housing and credit problems, we think it is an acceptable risk.
Brent Archer is an options analyst and writer at Investors Observer. At publication time, Brent neither owns nor controls positions in GPS.
Abercrombie & Fitch Co. (NYSE: ANF), Gap Inc. (NYSE: GPS), and Nordstrom Inc. (NYSE: JWN) are scheduled to report earnings next week, offering a chance to see how these apparel retailers have been doing in the lead-up to the holiday season.
Abercrombie hasn't fallen short of Wall Street's earnings expectations since Q2 2006. When it reported second quarter 2008 results back in August, earnings were 88 cents per share, beating the consensus estimate of analysts surveyed by Thomson Financial by a penny, as well as the actual 72 cents per share in the same period a year ago. For the third quarter, analysts expect $1.28 per share, up from $1.11 in the same period a year ago.
Abercrombie's 13.6% earnings per share growth forecast for the next year is better than the S&P 500, and much better than the apparel retail industry average of -0.5%. The analysts' consensus recommendation has been to buy Abercrombie for at least six months, but about half of those analysts rate it a hold. The share price reached a 10-year high of $85.77 earlier this month, before sliding to close Friday at $75.01.
For news about Abercrombie and other retailers that could influence the earnings results, check out BloggingStocks' Abercrombie & Fitch coverage.
During summers and winters in the early 1990s, I used to work for Williams-Sonoma (NYSE: WSM). In many ways, it was a dream job. I was paid to talk about cooking, learn about cooking and demonstrate cooking tools. One day, however, it occurred to me that, as much as I loved adopting a slightly condescending air when selling high-priced kitchen items, there really was a problem with the products that I was hawking. That afternoon, I talked an older woman into buying a "Tuscan grape drainer" as a gift for her niece's wedding. As the woman left the store, I realized that I had just convinced her to shell out $49.95 for what was, essentially, an earthenware bowl with holes in it and a couple of grape decals stuck on top. 
When 
In a move designed to make it easier and more appealing for consumers to shop at its websites, 
Ubiquitous mall retailers 
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Alcoa's Q2 2008 earnings transcript
Anheuser-Busch (BUD) sues InBev, what's next?
Wal-Mart might help your portfolio during the recession
