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Cramer: What’s Happening in the US Retail Space?

Chiaki Tsukumo

Instead of blaming the rest of the world for your troubles, why not focus on what’s happening on the domestic side? Jim Cramer asked Tuesday on CNBC’s “Mad Money.”

After all, Coach did exactly that this morning after reporting a lackluster quarter. Shares of the luxury handbag company quickly lost 10 points, or more than 17 percent on the heels of that report. But even though so many other companies have blamed international business for their losses, he said, Coach said its overseas sales were actually pretty robust and said North America was the real problem. “It wasn’t the luxury side that killed him,” he said. “It was the cheaper, trade-down factory stores.”

And if Coach is having a tough time, what about the rest of the retailers?

Cramer turned to Chico’s, the women’s clothing chain he calls one of the greatest turnaround stories of the last few years. While Morgan Stanley and Piper Jaffray were both neutral on the firm last week, Morgan Stanley downgraded the stock to a sell and Piper Jaffray upgraded it to a buy. So, which analyst is right here?

Prior to hearing Coach’s numbers, Cramer said he would have sided with Piper, because Chico’s underwent an “incredible resurgence” under the guidance of former CEO David Dyer. Dyer moved to restore Chico’s classic boutique image and streamlined costs to get the company back on track. But after the blowup Coach saw this morning, “with retail very much in the crosshairs,” Cramer’s thinking twice about ignoring Morgan Stanley’s bearish point of view.

Analysts at Morgan Stanley argued that Chico’s comeback story could be reaching its peak — especially after 12 straight quarters of same-store sales growth, he said. But the bulls at Piper Jaffray said concerns over sales and promotional activity are overdone and think that sell-throughs on new ideas could offset the effect of the markdowns. Cramer said MS also thinks broader, macro uncertainty will cause consumers to tighten their purse strings further, while Piper chooses to focus entirely on the micro story and Chico’s own specific initiatives.

With Chico’s reporting earnings in late August, Cramer doesn’t think it should be too hard for them to post some strong numbers. He said the firm was facing “pretty easy comparisons” versus 2011 and that management at Chico’s has mastered the art of under-promising and over-delivering.

In the long run, Cramer said Chico’s is “still a fabulous story,” noting that the stock is still cheap — trading at just 12.6 times 2013 earnings with a fruitful 15 percent growth rate. And the retail chain still has plenty of room to expand its margins, he added.

But all of Coach’s talk about an “overly promotional environment in North America” has the “Mad Money” host a little worried about Chico’s because its business is 100 percent domestic. And while this is normally a good thing, even domestic exposure could be a problem if the retail space is getting tougher in the U.S., he said.

So, would he buy Chico’s stock ahead of the quarter?

“That’s a toughie,” he said — adding that if shares rallied ahead of its next earnings report, he would sell into that strength. “Then, if the stock sells off after the quarter, you can buy it back at a lower price,” he said.

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