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2012/01/17

Apple To The Rescue!

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Todays DWR

Apple To The Rescue!

by Robert Morris

The numbers are out.  And they're not pretty.  US retail sales inched ahead in the final month of 2011 at the slowest pace since June. According to the Commerce Department, retail sales increased by an anemic 0.1%.

That's far behind the 0.3% growth economists were expecting.

December also marked the third straight month retail sales grew at a slower rate.  They increased by just 0.4% in November and 0.6% in October after surging 1.1% in September.

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You don't have to be a mathematician to see the ominous downward trend here.

American are clearly keeping a tighter and tighter grip on their wallets.

What's even worse about this trend is when it occurred.  The sales slowdown was spread across the industry's most important time of year... the holiday shopping season.

During the holidays, retailers bring in as much as 40% of annual revenue. If retailers can't grow during the holidays, what does it say about the industry's prospects for 2012?

And that's not all...

Not only are customers spending less, they began doing so just as many top retailers were slashing prices.  Bloomberg reports retailers went on a "discounting binge that was deeper and longer than ever - especially [at] stores that cater to middle-income shoppers."

American Eagle Outfitters (AEO), Target (TGT), JC Penney (JCP), and Kohl's (KSS) all cut prices to the bone in December.  And now they're paying the price.  Each company just lowered their profit forecasts for the fourth quarter.

As you might expect, their stocks are dropping as a result.

American Eagle and Kohl's are both down a stunning 18% from their recent highs.  Target has dropped 11% since late-October.  And JC Penney has given up 5.5% since the beginning of the year.

The outlook is clearly grim for these and many other retailers.

But things may be looking up for one of these retailers...

Target announced last week that Apple (AAPL) is going to open mini-stores within 25 different Target locations.  It's a trial run to see if the concept is worth expanding throughout the Minneapolis-based chain.  If it works, you could see expanded Apple displays at more of Target's 1,752 stores.

Apple is clearly playing white knight to Target's damsel in distress.

Target hopes having a broader display of Apple products will bring more customers into their stores.  No sense battling crowds at the Apple store if you can buy the same products at the same prices at a less crowded Target location.

And the strategy has a history of success.

Best Buy has benefited from having Apple mini-stores at their locations since the mid-2000's.  And major department stores have prospered for years from stores-within-stores by Ralph Lauren and Chanel.

It certainly look like investors are intrigued by the strategy...

TGT Chart

As you can see, Target shares plunged on January 5th.  That's the day Target announced December same-store sales rose less than expected and then lowered fourth-quarter earnings guidance.

But TGT has been moving higher ever since the deal with Apple was announced.  The deal could be just what the struggling retailer needs to get investors excited about the shares again.

Take a closer look at Target for your own portfolio.  They could be the next company to benefit from a relationship with everybody's favorite maker of consumer electronic devices.
 
Profitably Yours,

Robert Morris


Issue Date:
Tuesday, January 17, 2012


Notable Highs and Lows

•  AutoZone (AZO) hit a new 52-week high of $344.44.  Their market cap is now over $13 billion.

•  Achillion Pharmaceuticals (ACHN) hit a new 52-week high of $12.95. They have a market cap of over $862 million.

•  Pegasystems (PEGA) hit a 52-week low of $26.35.  Their market cap is now just under $998 million.


Quote of the Day

"Money is made by discounting the obvious and betting on the unexpected."

                           -George Soros


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