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Posted on NOV 25, 2019

Investment Commentary | Monday, November 25

This is part of an ongoing series of articles published by Johnson Financial Group. This issue is written by Brian Andrew, EVP Wealth and Chief Investment Officer.


Whose Parade Is It?

Last week, many retail companies reported earnings for the third quarter. Once again, it was the haves and have nots. Target crushed it with outperformance while Macy's slashed forward growth and earnings due to a poor outlook. A look at the winners and losers may help us determine what's working and what's not. We may also gain some perspective on the health of the consumer from these reports. Given the poor performance of Macy's, the Thanksgiving Day parade may have someone else's name on it next year!

The Results

Target beat analysts' estimates for earnings by a big margin. Earnings were more than 14% better than expected and revenue also beat estimates, growing to $18.67 billion for the quarter and 4.7% higher than 2018. Most importantly, same‐store sales, a measure of the validity of retailers' strategies, were up 4.5% versus the 3.6% expected. The stock is up 15% since the report.

Target has been pursuing a digital strategy to compete with the likes of Amazon by taking advantage of their physical locations. Digital sales were up 31% during the quarter. Their “Shipt” platform allows for “almost 90% of the delivery cost to go away, when customers' orders can be fulfilled from in‐store rather than the distribution center,” according to the CEO. He also indicated in the report that they expect the best holiday season they've had in over a decade.

Kohl's earnings were 14% below expectations, while same‐store sales were only up 4%. Kohl's didn't talk much about their digital strategy, rather focusing on challenges from competition and noting the warmer September weather. It seems like the weather is always a factor when retailers miss their numbers! The stock is down 20% since the report.

They highlighted that they are now able to take Amazon returns in all stores and hope this will drive foot traffic. My own experience last week suggests that if the return location is in the front of the store, as it is in the one nearest me, it may not help. I watched 10 people come in, return their item and head back out the front door. Still, the CEO indicated that they “enter the holiday period with momentum,” indicating they expect a strong season.

Finally, Macy's reported a same‐store sales decline for the first time in two years. The CEO noted that the sales deceleration during the quarter was “steeper” than expected due to “a warmer fall” and weak performance in lower tier malls. These notes highlight the problem for Macy's, a reliance on mall traffic and discounting to compete for in-season sales. Of note, there was little in the report about their on‐line strategy – it was lumped into the same‐store sales numbers, which likely indicates there isn't much of one to begin with. That may be why the stock is down more than 30% since January.

The Consumer

The health of the consumer is key as we look forward to 2020. Making up over 70% of the U.S. economy, a well-off consumer segment can keep growth in positive territory while the economy fights the manufacturing slowdown.

Unemployment remains below 4% and wage growth has remained near 3%, high enough to create a benefit, yet not so high as to raise inflation measures substantially. This would seem to be a recipe for a strong holiday season of sales. (Speaking of recipes, do you have yours ready for Thanksgiving?) December 6 will provide some insight – that's when the next jobs report will be released.

We'll get an indication of the season's spending when Black Friday and Cyber Monday sales are reported. Given the positive outlook for personal income and jobs growth, we suspect sales will be decent.

Enjoy the holiday week and the Macy's Thanksgiving Day parade. This might be one of their last.

Brian Andrew
As EVP Wealth and Chief Investment Officer, Brian Andrew leads Johnson Financial Group's
investment strategy to provide consistent, actionable investment solutions for our clients.

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