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Reuters Insider - Trading at Noon: Home Depot, Kohl's fall after cutting their forecasts

Wed 20th November, 2019 11:18am
Click the following link to watch video: https://share.insider.thomsonreuters.com/link?entryId=0_j02vzirt&referenceId=0_j02vzirt&pageId=ReutersNews
Source: Reuters Insider

Description: Home Depot slides after reducing its outlook as does Kohl's.
While TJX raises its guidance. We look at the retail sector.
Short Link: https://tmsnrt.rs/2pBAk3G

Video Transcript:

Welcome to Trading at Noon. I am Leah Duncan. It's a retail rout today. Kohl's
and Home Depot cut their forecasts this morning, following the release of
quarterly results leading to a rough day for the entire sector. TJX is a
bright spot however. Refinitiv Director of Consumer Research Jharonne Martis
joins us now. Great to have you on the show. It's been some time, but you're
here so it's all good. 

Thanks for having me. 

Let's start with Home Depot. That stock down about 5%. Fill us in on what's
going on with Home Depot. 

Sure, the company lowered their guidance and therefore the stock took a hit.
But they did lower guidance with reason. What we're seeing is that common
theme that we've seen with other retailers previously which is that they're
investing in the long-term omnichannel IT experience. And this is an
investment that is necessary. It's what we called the "necessary evil", but in
the long term will pay off. Home Depot told us today that their online sales
grew 22%, which is a very remarkable number. And out of the online orders,
over 50% of them are actually order online and pick up in store. So as you can
see, there is a necessity to interconnect and really invest in the omnichannel
because consumers are using it. So enhancing this experience is an investment
that will cost Home Depot some money and it's going to hurt them in the short
term but in the long term will pay off. And we've seen this with other
retailers, like Target, who for the last couple of years had- they saw an
increase in cost, lower profits. But then in the long term, now we're seeing
those profits pay off, those investments. 

But then why are investors punishing this stock if they know that in the long
term is going to pay off? 

They wanted results sooner maybe? 

Well, no, because regardless, the company is one of the best performing ones.
And it's actually one of the ones most poised to continue to doing well. And
therefore, because they have the goods to back it up and they are
well-positioned, they can afford to do something like this. They can afford to
have heavy investments for the long term. It's necessary if they want to
continue with the strength. And if you put everything in perspective, sales
grew 3.5%, which is very remarkable, same-store sales 3.6%, just so you know- 

Weaker than expected though. 

Weaker than expected but a 3% reflects healthy US consumer spending. And they
were facing very difficult comparisons from a year ago. So when you face very
difficult comparisons and you're still able to post same-store sales above 3%,
it's actually pretty good number. But Home Depot is one of those retailers
that are just known for quarter after quarter to really beat by far, and
because they didn't and because they lowered guidance-

The expectations are so high, that's right. 

Yes, they got punished a little bit. 

I think it's also noteworthy, Jharonne, that this quarter- this time of year,
not really the strongest for Home Depot. They're more see strength in the
spring, right? 

That is correct. And it's not just Home Depot, but in general, what we see in
the retail space is second quarter tends to be pretty healthy going into the
back-to-school season. We see a little bit of that going into the third
quarter, but then consumers actually take a break before going into the
holiday season which they're going to be spending significantly. So this is a
trend that we see very frequent in retails. 

Alright, let's move onto Kohl's, plunging close to 20% today, Jharonne. 

Yes, so Kohl's is the first department store to report and it's actually the
department store that has been performing the strongest and have positive
same-store sales at 0.4%. So if Kohl's is struggling, then is setting the tone
of what we could expect for the other department stores, as Kohl's tends to be
the strongest. I do want to point out that the department stores are not lazy
about their survival. They've been out of favor for some time now. And Kohl's
today already telling us that they have been doing some initiatives. They've
been partnering up with a couple of designers like Ellen Degeneres to have a
pet brand, and also with other designers to have more of a high-end furnishing
brand at their stores to try to really increase their visibility in terms of
brands and better brands. But they've been doing this simultaneously while
having pop-ups and trying to really target that Millennials. So there's a lot
of things going on at the same time and instead of just honing possibly on
just a couple of strategic initiatives to see which ones work better. They
have said that the Amazon partnership is continuing to work well for the
retailer. 

Not really seeing that much of a benefit. 

Not much of a benefit but, again, they're the only department store that has a
positive same-store sales and they are the strongest, so it really underlines
that what we're seeing- the struggle that we're seeing with the department
stores, and our research shows that if the tariff are implemented in December,
the department stores are the first ones to be hit the hardest. Most likely a
lot of them, their probability of increasing to filing for bankruptcy will
also increase. So the department stores are very vulnerable right now. 

Yeah, I just want to kind of clarify one thing for our viewers. As far as
Amazon goes, Kohl's does have a partnership with Amazon to allow customers to
return packages to that store. Alright, so let's move on, because TJX is
actually having a good day. That's a bright spot for the sector today. 

Yes. So when you compare TJX and Kohl's, Kohl's actually did say that they
lowered guidance because it's a very promotional environment. So it underlines
again that the value proposition is very important to consumers. It's very
center and key going into the holiday season. So you're seeing that because of
the value proposition, Kohl's is struggling, but because TJ Maxx is able to
give that to consumers, give them high-end merchandize for less, then they are
able to increase their guidance. So you're seeing like how important value
proposition is. Because of value proposition, the department stores struggle,
but then the off-price retailers do better and they're able to increase their
guidance. TJ Maxx also saying that they're expecting 3% same-store sales for
the fourth quarter. They are one of the best positions going into the season
as they are expected to be a favorite among the customers. And it's also very
important to note that they have a business strategy that it's very difficult
to duplicate online. So the bargain hunting, the treasure hunt experience is a
very specific- unique business model that's very difficult to duplicate
online. And as a result, you're seeing that they continue to strive and have
that customer loyalty that continues to translate into store growth and
positive same-store sales. 

And TJX also saying today, Jharonne, that it is taking a stake in a Russian
low-cost apparel retailer, Familia. So I guess it's also looking to expand its
business there. I want to point out though, Jharonne, we had these numbers
from Home Depot today. We got the numbers out of Kohl's disappointing. This
comes on the back of the retail sales figures that we got last week that did
suggest that consumer spending was slowing faster than expected. What's your
overall sense? 

Well, the consumer is still engaged. They're still shopping at TJ Maxx,
they're still shopping at Wal-Mart. These are the retailers that continued to
increase guidance. And I think Wal-Mart is a proxy of the health of the US
consumer because of their proximity to the US consumer. So I think the
consumer is still engaged. It's just where are they shopping. They're
gravitating towards value. Now the retail sales numbers were significantly
stronger in the previous two months because consumers went out and bought
brand new cars. It's also important to note that gas prices have been
decreasing significantly. So as a result, those retail sales numbers are also
shopping a decrease in spending. But it's what we said earlier that in the
third quarter, you tend to see a slowdown in consumer spending no matter what
because consumers already spent a lot of money on brand new cars, and now
they're ramping up for the holiday season. So I don't think it's alarming yet
to see these numbers. I think the holiday season will give us, again, a good
proxy of where the consumer stands. But Wal-Mart numbers, TJ Maxx numbers are
telling us the consumer is engaged. They're just very value-oriented. So
you're seeing that they're gravitating towards those stores. Those stores tend
to do better. And then the others, like the department stores, are struggling.


Macy's, Target, Lowe's among- Nordstrom, among the names coming out this week.


Yes. 

Which one are you watching the most? 

Target, because Target already showed us last quarter that they are finally
benefiting from those heavy investments that they did in technology. And we
want to see that continuing as a trend. I also want to see how grocers are
doing, and the competition against Amazon and Wal-Mart. Target is a favorite
going into the holiday season because of their toys. They've really been
benefiting of the close- the store closures of Toys "R" Us, so they've gained
a lot of that consumer. So really seeing how Target is going to do because
that's also going to reinforce what we're seeing that the consumer is still
engaged and they're gravitating towards value and discounting. 

Alright, we'll leave it there of now. Jharonne Martis, Director of Consumer
Research at Refinitiv, pleasure to have you on the show with us, talking all
things retail.

Thanks for having me. 

Alright, let's move on and check out the markets. Stocks overall are mixed on
this Tuesday. Home Depot is the worst performer in the Dow Jones Industrial
Average, which is down 0.4%. The NASDAQ meanwhile up just around 0.25% this
hour, led by healthcare. The S&P is flat. The S&P 500 Retail Index is down
more than 1%. And moving onto some other stocks we are watching today. We
begin with AT&T. Broker MoffettNathanson downgraded that stock to 'sell' from
'neutral'. It says it is hard to believe the wireless carrier will reach its
aggressive 2020 guidance as competition increases. And shares are sliding 3%.
Also, Slack Technologies- the workplace messaging app's chief rival,
Microsoft, reported that its Teams app now has more than 20 million active
daily users, and that's up 50% from July. The stock is dropping 9% and remains
below its $26 IPO price from the month of June. And Altria, which owns a 35%
stake in e-cigarette firm Juul Labs. New York's Attorney General has sued Juul
Labs, accusing it of deceptive marketing practices, targeting minors and
misleading consumers about nicotine content. Shares are down 2% today. Well,
that's a wrap. That does it for Trading at Noon on this Tuesday. I am Leah
Duncan, and this is Reuters
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