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This is The Takeaway from today’s Morning Brief, which you can sign up to receive in your inbox every morning along with:
‘Tis the season to go shopping for retail stocks, provided you know precisely what you are looking for.
To that end, a quick cautionary reminder as you get prepared to digest three days of data on Black Friday and Cyber Monday. This reminder comes from Walmart’s CFO John David Rainey in the above video from Yahoo Finance Live.
“Black Friday really is no longer a day. It’s more of a concept. We at Walmart started our events on Nov. 8 with deals for our customers,” JDR (as I refer to him while sitting alone at my desk) told me.
The former PayPal CFO is right on.
Black Friday exists in name only, and has for some time.
Retailers in recent years have pulled their holiday promotions to early November, or even late October. That means Black Friday sales data — while a decent indicator on consumer health during a key period of economic activity — is not what it used to be as a predictor. The holiday season is simply more spread out.
Take it all with a grain of salt and apply common sense to investing in retailers, especially this year.
Many, many households across the country find themselves under considerably more financial stress this holiday shopping period. Sure, inflation may have cooled a bit and gas prices have retrenched.
Interest rates are much higher, making it difficult to pay off credit card balances. Student loan repayments are a huge deal for many, and a towering challenge to retailers selling discretionary merchandise such as Macy’s and Best Buy.
To have any success picking retail stocks, you have to really look for two things.
First, go back to the past two weeks of earnings calls from major retailers to get a sense of how November sales have started. Not all retail execs comment on this; they generally hate focusing on the short term and caving into Wall Street analyst demands. If a retailer didn’t offer up even a hint on November sales to date, it’s a red flag in my humble view.
Case in point: Best Buy’s earnings call was terrible; you left with zero sense on the inflection point in a business seeing quarters upon quarters of sales declines. A fourth quarter sales warning from the electronic retailer underscored the reality.
On the other hand, Abercrombie & Fitch CEO Fran Horowitz told me on Yahoo Finance Live the holidays have begun on an “encouraging” note. That comment came after another big quarter for the company.
Double win comment wise.
Chances are Best Buy has another lackluster holiday season (thanks in part to the economic pressures mentioned above), while Abercrombie & Fitch delivers the goods barring an unforeseen development.
So that is retail stock selection screen one.
The other lens to apply is a daily monitoring of promotions — you can track these trends online and chart them. Doing this is more important this year given what I am hearing on the promotional cadence — discounts could be deeper early on in the season, as retailers battle for early wins in a meh economy.
That will come at the expense of margins, pros point out.
“Shoppers expect upwards of 30% discounts for Black Friday for them to consider it a good deal. More deep-discount selling days are good for volume but can wreck margins. The risk is not only that November sales will be lower margin, but that the growing “black hole” of Black Friday will cannibalize full-price sales from two important high-margin periods: Sept/Oct (new Fall collections) and December (an important selling period for those laggards who didn’t buy gifts in November),” Bernstein analyst Aneesha Sherman said in a new client note.
If it looks like a retailer is offering robust promotions — in terms of breadth and depth — it’s not a good sign. Target strikes me as one prepared to get aggressive on promotions this holiday to move merchandise, at the expense of margin.
I recently met up with Tapestry’s CEO and came away thinking promotions will be consistent versus last year (a good thing).
As for me, I am still a Black Friday store-visit junkie. I will be on Yahoo Finance Live in the 9 a.m. ET hour from Roosevelt Field Mall in Long Island, N.Y. Yes, I will be counting bags and crowds … despite Black Friday existing in name form only.
Tune in!
Brian Sozzi is Yahoo Finance’s Executive Editor. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn. Tips on deals, mergers, activist situations, or anything else? Email brian.sozzi@yahoofinance.com.
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