Retailers hit on Gap , Aeropostale lowered guidance. GPS down 18 percent, ARO down 14 percent pre-open, Ann Taylor down 7 percent, American Eagle down 4 percent, even Abercrombie & Fitch down 2 percent.
See my TraderTalk note yesterday for an explainer on what is happening with the middle and lower end retailers.
Simply put: the lower end retailers are getting hit because many lowered prices to drive sales. But sales have not increased much, and costs have gone up due to inflation. Boom, a triple whammy: lower prices, disappointing sales, higher costs. Margin squeeze.
High-end retailers are doing better because their customers have more money and they made a decision to do less discounting, because their customers were more willing to buy at full price.
1) In many ways, the most interesting story this morning is John Malone's Liberty Media offer to buy Barnes & Noble for $17 a share, a roughly 20 percent premium, which has some scratching their heads. BKS is in deep trouble: they've already suspended guidance, suspended the dividend, and closed many stores. The death of their main competitor, Borders, does not seem to have been much of a windfall for them, though it is still early.
But the nook is approaching an inflection point: costs are coming down, and profitability is going up, even on the hardware part, and sales are picking up. Publishers Weekly estimated ebook sales were now a $1 billion business; Amazon.com said yesterday that they are now selling more ebooks than physical books. This, of course, is coming at the expense of physical books.
How much of that $1 billion business does BKS capture? Not clear, but even a 25 percent share is real money. Still, don't kid yourself: Amazon.com has something like a 60 percent share of the digital market. They have a lower cost structure with a hybrid model: they have a digital site that distributes physical and ebooks.
What would Malone do with the roughly 700 stores that are still standing? My bet is that he would close some, and renegotiate the leases lower on most of the others. They have already closed high-profile stores in New York (in Lincoln Center and Chelsea), which in my mind shows some determination not to keep stores open just because they have high traffic.
Regardless: BKS is trading at $18 pre-open, above the offer price. Malone says the offer is contingent on the participation of BKS's chairman, Leonard Riggio (who owns about 30 percent of the company). The Street clearly believes others might be interested.
2) the issues hurting GPS are not apparent at Foot Locker , which is soaring, after handily beating estimates ($0.60 vs. $0.44 consensus). The athletic apparel retailer reported stronger-than-expected sales as comps rose nearly 13 percent. On top of strong top line growth, the company was able to manage its costs well, helping expand margins by a significant 200 basis points.
3) Corporate debt raising has been on the rise lately, with companies still taking advantage of relatively low interest rates to borrow money. But don't tell LDK Solar that. The Chinese solar company had to cancel its senior note sale because of higher interest rates. It noted it had hoped to "use the funds to pay down its short-term debts, but the recent increase in interest rates exceeded its original expectations."
A couple of notable dividend hikes:
a) Supermarket chain Safeway raised its quarterly dividend by 21 percent to $0.145 per share.
b) Media network Scripps Networks Interactive (the owner of Food Network of HGTV) boosted its quarterly dividend by 33 percent to $0.10 per share.
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