We'll leave all the Black Friday chest-thumping and cherry-picking to Wall Street and the mainstream media. The outlook for the Retail sector isn't pretty.
Below is an excerpt from a detailed research note written by Hedgeye Retail analyst Brian McGough sent to institutional subscribers earlier this morning:
"... We’re happy to get into the debate about how crowded the parking lot was at the mall this weekend, but it’s nowhere near as relevant as the current profitability growth trajectory for Retail, and the consensus expectations for the group as we head into 2016.
The good news is that 4Q [consensus] sales estimates look only slightly high. The bad news is that margins expectations are still 50-100bps high for the group. The worse news is that the Street’s numbers are banking on a recovery in growth and margin starting in 1Q16. In other words, it’s chalking up this ‘thing’ retailers are feeling now as exactly what management teams want us all to believe – while they cross their fingers, hope and pray that the economy is not really slowing.
The group might be viewed as damaged goods in this market, but keep in mind that it’s only down 4.3% for the YTD vs a 1.5% gain for the market – not a big difference. It’s trading at 18-19x earnings, and has short interest that is disproportionately low for an economy that is #LateCycle. We’re net sellers of Retail."
To be clear, McGough and his team currently have twelve short ideas and six longs.
If you were watching Thursday and Friday's morning business news, you probably noticed the non-stop coverage of Black Friday sales. For the record, McGough puts this comparatively modest post-Thanksgiving shopping into perspective:
"... I think most of us would agree that basing one’s view on a small handful of stores is a pretty useless exercise given that there are about 1,100 regional malls and 7,100 shopping centers in the US, which combined account for $5.3 trillion annually, $2.5 trillion in discretionary spending -- nearly $300 billion of that falls in the month of December alone."
Forget about Wall Street's Black Friday storytelling. It's almost immaterial in the grand scheme of things.
Moreover, watch out over the next few quarters. The U.S. economy IS slowing. As this evolves, a clear, yet underappreciated, trend is developing among Retail stocks...
And it's Down, Down, Down.
Editor's Note: To access McGough's Retail sector research email email@example.com.