Now that earnings season is over, let's take a little look at earnings expectations for the remainder of the year. We've already established that the group needs positive earnings revisions to take the stocks higher - and in some cases 'run to stand still'. Like it or not, I think we get that. Let's look at two factors...
1) First is the current bottom-up eps growth rate for the Apparel/Footwear Retail Supply Chain. We're looking at expectations for a 10% decline in earnings over the next 12-months. Is this reasonable? Yes, I think it is. In fact it better be given that the market is awarding a 15x pe on these earnings expectations. I like the names where I think there are meaningful company-specific earnings levers, like RL, UA and PSS. While there will unquestionably be companies at the other end, I find it more frustrating today identifying a miss than any time over the past four months.
2) So what's so unique about the group right now? Not to sound like a broken record, but the as outlined in our 3/5 group call (I'm Getting Fundamentally Positive on Retail) we're entering a period where sales trends are stabilizing, inventories are in check, capex is coming down by over 10% (25% if we exclude Wal*Mart), and we start to go up against very easy compares on gross margins and SG&A. Tack on conservative guidance by companies who are tired of missing, and we get to a few quarters where it's tough to be bearish in aggregate. This is best illustrated by our SIGMA chart below, here the latest quarter showed a move towards the upper right - meaning that capital efficiency is improving alongside a better delta on margins. As we've been trumpeting, this will continue into holiday, at which time key companies (especially footwear) will start to really benefit from lower sourcing costs.