Goldman's JC Penney Downgrade Signals Retail Bottom

Thursday, December 04, 2014 Goldman's JC Penney Downgrade Signals Retail Bottom   by Jamie Dlugosch   Shares of teen retailer Abercrombie & Fitch (NYSE: ANF) jumped 4% on Wednesday mornings after what could only be described as a poor earnings report. Abercrombie said it earned 42 cents per share in its third fiscal quarter, a drop of 19% from the year-earlier period.   That operating performance did beat the average estimate of 41 cents, thus explaining the positive reaction by investors.   That said, the profits came on revenues of $911.5 million versus the estimate of $916 million.   Perhaps more troubling is that the company slashed its profit estimate for the year. Abercrombie expects to earn between $1.50 and $1.65 per share.     FURTHER READING Collect Dividend Income Every Month!   We've put together a simple calendar that pulls together all the market's best dividends into a single, easy-to-read document. One look, and you'll be able to set up a 12-month dividend stream for regular income every month. Click here to see the full details.     That's 10 cents per share lower than the current $1.75 per share expectation on Wall Street.   So how do explain the market reaction on what was really a negative earnings release?   I think the answer is that retail has just about bottomed and from a contrarian standpoint,   the more negative news the more positive it is for retail stocks in general.   Speaking about negative news, how about the Goldman Sachs downgrade of JC Penney (NYSE: JCP)?   Goldman analyst Stephen Grambling cut JC Penney to Sell from Neutral, citing concerns about the never-ending turnaround effort for the struggling department store.   The basis for the most recent downgrade appears to be concerns about recent results from online sales.   In the third quarter, JC Penney reported online sales growth of 3.4%, well off the 16.7% increase during the second quarter.   Given that other retailers are consistently showing double-digit sales growth online, Grambling is concerned that the turnaround may not be working.   The hope for JC Penney was that a return to its old strategy would help recover lost sales during the failed Bill Ackman period of control of the company.    The reality, according to Grambling, is that competitive challenges are making that difficult. In essence, Grambling's call is a macro-based downgrade that is looking more at the long term than the short term.   However, I would use the 5% drop in share price as an opportunity to capitalize on a short-term trade of JC Penney. That's because retail is about to get a huge boost of stimulus from lower crude prices.   The extra money in consumer pockets is going to be spent elsewhere and with JC Penney offering discounts to lure lost customers, the retailer is uniquely positioned to capture a big chunk of any extra spending.   In addition, expectations for retailers are so low at the moment that future months and quarters should be easy to beat.   If there is one thing you can count on in the U.S. economy, is that consumers will spend when they have the money.  With gasoline prices so low, they have more money than they might realize.   When the light bulb goes on, consumers will go on a spending spree.   Even if JC Penney in the long run is a dubious selection according to Goldman's Grambling, I think the next six months are going to be very strong.   Jamie Dlugosch Editor Investor Research Institute   To Read More From Investor Research Institute Click Here
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