This article originally appeared at 10 a.m. ET on Real Money, Feb. 24, our premium site for active traders. It has been updated to reflect Warren Buffett's comments. Click here to get great columns like this from Brian Sozzi and other writers even earlier in the trading day.
Even investing legends are unsure from time to time about outlooks for sectors and companies.
"Retailing is tough for me to figure out," billionaire investor Warren Buffett said in a CNBC interview on Monday, mostly because the internet has swept in and offered shoppers enormous variety and sharp prices at their fingertips. Buffett's concern on retail was perfectly captured by his Berkshire Hathaway's (BRK.A) - Get BRK.A Report recent sale of a $900 million stake in Walmart (WMT) - Get Walmart Inc. Report . The sale left Buffett with no exposure to the dividend-paying world's largest retailer. Buffett added in the interview that Walmart is a "great company."
Buffett's comments follow in the wake of an interesting period for the nation's retailers.
Names such as Walmart (WMT) - Get Walmart Inc. Report , Macy's (M) - Get Macy's Inc Report , Nordstrom (JWN) - Get Nordstrom, Inc. (JWN) Report , Kohl's (KSS) - Get Kohl's Corporation (KSS) Report and Gap (GPS) - Get Gap, Inc. (GPS) Report have come out and handily beat lowered Wall Street profit estimates for the fourth quarter, sending shares higher. As usual, retail CEOs have chosen to take optimistic approaches to their financial outlooks. Doing so is egregious in light of the industry's current challenges, so if the consumers don't come out and shop until they drop this spring, it's likely these rosy outlooks will be cut mid-year. Meanwhile, inventory levels for the industry are in relatively good shape, as retailers used weak fourth quarter sales trends as an excuse to discount excess stuff. Many a stock analyst will no doubt be optimistic on retailer profit margins in the first half of the year, simply because of inventory levels running in line, or below, the pace of sales trends.
Further, there have been some cool new initiatives worth discussing. TJX Companies (TJX) - Get TJX Companies Inc Report is launching a new home goods concept instead of just buying beleaguered Pier One (PIR) - Get Pier 1 Imports, Inc. Report or Restoration Hardware (RH) - Get RH (Restoration Hardware) Report . The expansion of that concept will be fun to watch. Gap's Old Navy brand is testing a smaller store format, which is more than 10 years overdue. Abercrombie & Fitch (ANF) - Get Abercrombie & Fitch Co. Class A Report has a new store design for its flagship name that is both sleek and easier to shop, and getting some buzz still on social media. And struggling Macy's could be poised -- within the next six months -- to announce a major monetizition of its New York City flagship store.
But despite what feels like renewed optimism on retailers right now, the reality remains that the space sucks. It sucks from an investment standpoint, primarily because the industry sucks from a fundamental standpoint. It also sucks from a news-flow perspective as negative surprises continue, most notably J.C. Penney recently announcing more than 130 store closures this year.
Meantime, leave it to specialty apparel retailers to offer up the latest reality check. These companies are reporting more worrisome declines in mall traffic, amid the shift to digital shopping and the fact that people aren't buying clothing and accessories as they have in the past (they used to invest in stocking up a closet, now they buy to need). Commentary on current traffic trends has been so worrisome, one has to wonder how the quarters for restaurants such as DineEquity (DIN) - Get Dine Brands Global, Inc. Report , which in many cases has Applebee's and IHOP's that are near a mall, and Starbucks (SBUX) - Get Starbucks Corporation Report ,which are in malls, are doing.
Check out some of the comments:
"I'm sure you see the public data and you could tell that traffic continues to be tough. We have seen a pretty consistent [traffic downturn] of about 3% a year and now it has gone deeper than that. Sometimes we see deeper than that. The public data would say that February started out significantly deeper than that due to a number of things, not the least of which was the holiday shift." —Gap CEO Art Peck
"Just a thought on February, February was very much a month of ups and downs, and we were surprised by traffic trend, especially in the middle of the month during the holiday shift, about a 12-day period." —Bath & Body Works CEO Nicholas Coe (division of L Brands (LB) - Get L Brands, Inc. (LB) Report )
"Our operating results reflect another quarter of mall traffic declines from continued retail industry challenges. In response, we are ramping up our efforts to bring more distinctive brand and service experiences to Dillard's (DDS) - Get Dillard's, Inc. Class A Report , both in store and online." —Dillard's CEO William T. Dillard II
It's not news that mall traffic continues to be under pressure. What is new is the extent of the declines this year. They are worse than an already bad trend. Take that and assess how retailers are now being forced to respond—more marketing and possibly more promotions—and you get a backdrop for retail that isn't warranting of the fresh round of Wall Street optimism.