Wednesday, April 9, 2008

Bed Bath & Beyond and Tomorrow's Retail Spin

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Just a warning for tomorrow morning's spin. At the beginning of each month we get the same store sales numbers from major retails. Analysts have been slashing their expectations constantly as they move from "denial" to "somewhat reality". After multiple slashings, some of the retailers are going to "beat" i.e. "well analysts were expecting a 7% drop in same store sales, but it only came in at 5.5%!" At that point the drumbeats and salsa music will start on CNBC as the party begins... chants of "the consumer is back" will reign, Kool Aid will be dripping off the bibs of various pundits, and the clapping of seals will commence. Continue to smirk to self, and ignore them.

The importance is the direction of sales ... down. And these numbers do not account for inflation. If you believe (cough) inflation is 3%, then sales need to go up 3% just for unit sales to be flat. So negative sales are actually far worse than they look on the surface since they do not adjust for inflation. Now the question is what is "priced into the stocks" - these stocks have already been decimated, but I continue to believe they are in serious trouble. There is not going to be a quick rebound. Remember, everyone is counting for this magical $600 check to save the consumer, and a light, shallow, and "done in 6 months" scenario. I continue to believe that is utter nonsense. But outside of a few names which deserve some kudos i.e. Walmart, Costco, it's going to be the "bullish" case proposed for a "reason to bottom fish". Much like the financials and homebuilders, we are going to see constant selloffs, punctuated by dead cat bounce; short covering rallies of huge magnitude - unless your timing is perfect, catching those moves up will be very difficult. But on each move up, we will hear "no really, this is the bottom" - the constant refrain we've heard from these groups for 6+ months now. One day they will be correct... but not yet.

Now on to Bed Bath and Beyond (BBBY) the first major name to have reported. I've been constantly harping how full year 2008 guidance is just plain wrong in any company facing the US consumer. So stocks that look "cheap" are not cheap, because the estimates are a work of fiction. Let's look at what BBBY has to say... a case example of what I see happening across the board this quarter and next quarter as people move from denial to reality.

Guidance

Q1 2008
Last year's number: 38 cents
Analysts' guess for this year: 36 cents
BBBY reality check: 26-30 cents

Full Year 2008
Last year's numbers: $2.10
Analysts' guess for this year: $2.15 (signifying morbid "growth", but still growth)
BBBY reality check: Earnings to be 3-15% lower than $2.10

i.e. "Assuming no significant change in the macroeconomic environment, the Company estimates that its fiscal 2008 earnings per diluted share will decline from a low double digit percentage to a mid teens percentage from the $2.10 per diluted share reported for fiscal 2007. This estimate is based, in part, upon the assumption that the comparable store sales for all of fiscal 2008 will be relatively flat to slightly negative.

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Takeaway: Don't worry about facts on the ground- everything will be fine "in 6 months", pundits assure me.

Reality Check: See above. And repeat for company after company relying on the washed out US consumer. Retail. Restaurants. Done. Continue to cling to Ultrashort Consumer Services (SCC) although its top 2 components (MCD/WMT) are going to be beneficiaries from American shoppers "moving down" (not by choice). [Target Shoppers Turning into Walmart Shoppers] Not so much for the rest of the index...

Long Ultrashort Consumer Services in fund and personal account

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