• It's Coming...

    MARKET EDGES

    Identify global risks and opportunities with essential macro intel using Hedgeye’s Market Edges.

With several retailers reporting earnings this morning there are a few quick callouts that caught my eye.

DLTR:  EPS of $0.76 vs. the Street at $0.66, with upside driven by previously announced strength in same store sales (+6.5%) and better than expected operating margin expansion (almost equally split between gross margin expansion and sg&a leverage). Inventories appear to be well controlled, increasing 1% vs. a sales increase of 12.1%. EPS guidance is in-line with the Street while comp guidance of low to mid single digits does imply some deceleration from 3Q’s 6.5% increase.  Overall, with expectations still high for the deep-discount/dollar stores none of this should be terribly surprising. 

FRED:  Another disappointing result here, with 3Q EPS missing estimates by a penny.  Guidance for 4Q also below the Street at $0.17-$0.24 vs. $0.25.  Bottom line here is that the company continues to struggle with industry-wide deflation and its competitive positioning vis-a-vis Wal-Mart and other deep-value players.  Deflation and pricing pressure to some degree can be offset by economies of scale and/or a low cost structure.  Both of these key items are areas where FRED is disadvantaged.  As a result, FRED is being disproportionately hurt by pricing investments in an effort to drive traffic.

BKS:  While on the surface BKS’ 2Q EPS miss by $0.02 and its substantially lowered outlook is surprising, it’s not what caught my eye this morning.  It’s the reason behind the miss that is most interesting.  Management is citing the need to increase investment in production, people, and marketing to support the higher than expected demand for the company’s e-reader called the Nook.  This could be viewed as a longer-term net positive as it is certainly good to see the Nook being well received by consumers, even after Amazon’s Kindle has taken the early mover advantage.  However, I can’t help but remember all the capital BKS spent on barnesandnoble.com after Amazon took the first mover advantage in online bookselling.  Now we’re in a similar situation and it’s abundantly clear that BKS is playing catch up already.  Yes the e-reader market is still in its infancy, but it’s still concerning to see BKS struggle with launch of the company’s first foray into the space.  History suggests that this won’t be the only quarter where the company struggles to get it right.  On the cusp of the most important quarter of the year, BKS is chopping its outlook in half before the Nook even ships one unit.  At the same time the company’s largest shareholder (Yucaipa) other than the founder, just doubled down its stake.

 - Eric Levine

   Director

DLTR, FRED, & BKS: A Few Callouts from a Busy Morning - DLTR SIGMA 11 09

DLTR, FRED, & BKS: A Few Callouts from a Busy Morning - FRED 11 09

DLTR, FRED, & BKS: A Few Callouts from a Busy Morning - BKS SIGMA 11 09