
If the Consumer Spending Is Strong, Why Are Retailers Struggling?
The S&P 500 ETF (SPY) - Get Report slipped for the fifth time in six sessions, led lower on Wednesday by Macy's (M) - Get Report . The stock fell 14% on the day on a disappointing third quarter earnings result, lower full-year guidance and the announcement it will not create a REIT structure.
Macy's CEO Terry Lungren didn't make it sound like a company-specific problem, Pete Najarian, co-founder of optionmonster.com and trademonster.com, said on CNBC's "Fast Money" show.
The warmer than usual weather is hindering sales of winter clothes for department stores, which will ultimately pinch margins as retailers look to dump excess inventory, Najarian said. Nordstrom (JWN) - Get Report reports earnings on Thursday, but he is optimistic due to the company's online business.
Guy Adami, managing director of stockmonster.com, is also optimistic on Nordstrom. As for Macy's, Adami pointed out that inventories climbed 4.6% year-over-year, while revenues dropped 6%. Operating margins are now sub-5%, which is not good.
Investors looking to play the retail trade should think outside the box and think of how customers are buying, not where they're buying. Adami likes Visa (V) - Get Report and MasterCard (MA) - Get Report , both of which hit a new all-time high.
Steve Grasso, director of institutional sales at Stuart Frankel, was also looking away from traditional retailers. Instead, he is focusing on the stocks that are doing well this year. He likes Nike (NKE) - Get Report , Under Armour (UA) - Get Report and Amazon (AMZN) - Get Report .
Consumers aren't going to traditional brick-and-mortar locations like they used to, according to Brian Kelly, founder of Brian Kelly Capital. As a result, he's bearish on mall-based REITs, like Simon Property Group (SPG) - Get Report .
Allen Questrom, the former chairman and CEO of J.C. Penney (JCP) - Get Report , said many department stores revolve around women's apparel and accessories, which aren't doing too hot right now - with the exception of "athleisure." The strong dollar is hurting tourism sales, especially in big cities like New York and Los Angeles, he said, adding that a rate hike will likely exacerbate the situation.
The weather -- although easy to blame -- is actually a legitimate reason behind a slowdown in sales. Not only do retailers see a drop in sales, but it eventually hurts margins when they have to sell the products at a discount to get ready for the next wave of inventory, Questrom said. And it's not the customer; they're doing fine. Auto sales are up, home goods are selling well and electronics are strong.
Despite generating $14.3 billion in revenues for Singles Day, shares of Alibaba (BABA) - Get Report actually fell 2% on the day. The figure is 60% higher than its results last year -- exactly when the stock topped out at $120 per share.
Mark Mahaney, lead Internet analyst at RBC Capital Markets, has a buy rating and $95 price target on Alibaba. Alibaba has "massive growth in a massive market," he said, adding that Alibaba has roughly 80% market share of the Chinese e-commerce market. The stock looks to have already hit a low, and should continue to move higher over the coming quarters as the company relies more on mobile revenues.
But Mahaney also likes Amazon - his number one pick headed into 2015. While Alibaba is attractive, if forced to choose between the two, Mahaney is going with Amazon, which he has a $775 price target on. The company's Amazon Web Services business has attractive margins and very impressive revenue growth, he added.
It's an "easy" pick for Najarian, who chose Amazon over Alibaba. Amazon doesn't have the counterfeit products or investor mistrust issues that Alibaba has encountered. Its cloud services business is the cherry on top. Grasso agreed.
Adami is also a buyer of Amazon, but will find Alibaba much more attractive on a drop to $71.
When dealing with the two stocks, Kelly said he would take some profits in Amazon, and use it to start a position in Alibaba, which should do well over the next five years.
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