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Takeover Talk and More Sends Retail Apparel Stocks Surging in May

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Despite an eleventh-hour swoon that sent it tumbling by over 200 points on the last day of the month, the Dow Jones Industrial Average rose 0.9% in the four weeks ending May 31, bringing its year-to-date increase to 16.8%.

Apparel and retail stock gains slowed compared to last month, but kept pace with the overall market. Retail stocks on average gained 0.9%, and have managed to turn in a 15.6% gain for the year so far, helped by real and rumored takeover activity and better-than-expected earnings performance at many key companies. The wholesale and manufacturing index jumped by 0.7%, bringing the year-to-date gain to almost 24%.

 

Retail Gainers and Losers

Steinmart (SMRT) was the top performing retail stock in May, jumping 50.5% to $12.93 per share. Comp-store sales at the 262-door department store chain jumped 8% in April, led by healthy sales of home textiles and women’s sportswear, beating Wall Street expectations of a 3% increase. Total revenue grew 1.6% to $99 million. For the first quarter, net income rose an impressive 35.6% to $14.7 million, or $.33 per share, compared to $10.8 million, or $.25 per share, in the prior year period. Total sales for the three-month period were up by 3.8%, while comps rose 1.2%.

Bon Ton Stores (BONT) surged 41.8% to $21.29, on news that the department store operator’s first-quarter performance beat expectations. The net loss of $26.6 million, or $1.41 per share, was a big improvement over last year’s loss of $40.8 million, or $2.23 per share, on a slight revenue increase to $662 million from $654 million. Analysts were expecting a loss of $1.48 per share on revenue of $659 million.

Rue 21 (RUE) advanced 27.6% to $41.99 on news that the 1000-door teen clothing chain had agreed to be bought by private equity firm Apax Partners for $42 per share, or $1.1 billion. The acquisition will reportedly allow the company to expand its bricks-and-mortar footprint to over 1,700 stores and implement new e-commerce initiatives. It is also launching RueMan, a new brand of accessories, watches and jewelry.  Rue21 has posted double- or triple-digit profit and sales growth every quarter for the last five years. Janney Montgomery Scott downgraded the stock from “buy” to “neurtral,” however.

Saks Inc (SKS) gained 25.8%, to $14.83 after news surfaced that the luxury department store retailer had hired Goldman Sachs to explore strategic alternatives including a possible sale to private equity firms such as KKR and Leonard Green Partners. The rumor mill also hypothesized that a merger between Neiman-Marcus Group might be a way for investors to extract the most value from such a transaction. Saks’s quarterly revenue increased 5.2% to $793.2 million, exceeding analyst expectations of $778 million. Comps rose 5.9% in the quarter. However, net income fell 38% to $20 million, or $0.13 per share, from $32.1 million, or $0.28 per share, well below consensus expectations of $0.18 per share.

New York & Co (NWY) rose 25.6% to $5.55, after the women’s specialty retailer reported better-than-expected earnings of $0.03 per share, beating analyst expectations of a $0.07 per share loss. Sales were flat at $227 million. Janney Montgomery Scott reaffirmed its “buy” rating and upped its price target by 50% to $6. Zacks upgraded its rating on the stock to “strong buy.”

Stage Stores (SSI) was the biggest retail loser, dropping 16.5% to $23.01, after the department store retailer reported adjusted earnings of $0.02 per share, 7 cents below analysts’ forecasts and three cents below last year’s same quarter, blaming unseasonably cool weather in March and April that negatively affected traffic and sales.

Walmart (WMT) lost 5.6% to $74.84, after the world’s largest retailer — and number one company on the Fortune 500 — reported that first quarter revenue of $113.43 billion beat last year, but missed estimates of $116.287. Earnings, however, came in at an expected $1.14 per share, shy of Wall Street’s hoped-for $1.15. The company blamed the delay in income tax refunds, cold weather, lower food prices, and the payroll tax increase for the sales shortfall and 1.8% drop in same-store traffic. Much of the news surrounding Walmart this month was about the 8-story apparel factory building collapse in Bangladesh that killed over 1,000 workers. Although it is unclear whether Walmart directly or indirectly used factories in the collapsed building, large clothing retailers are in the process of reviewing sourcing policies to insure that suppliers are maintaining safe and healthy working conditions. Changes in these policies might ultimately result in higher apparel manufacturing costs.

Sears Holdings (SHLD) slipped 5.1%, to $48.83, after the operator of Sears and Kmart lost $279 million in the first quarter, compared with a profit of $189 million a year earlier, as costs related to store closings and severance expenses hurt earnings.

Foot Locker (FL) stumbled 2.7%, to $34.32, despite posting stronger-than-expected sales and earnings in the first quarter. Revenue for the three months rose 3.8% to $1.64 billion, and comps rose 5.2%. Net income was $138 million, or $0.90 per share, compared with $128 million, or $0.83 per share, in the year-earlier period. The company agreed to buy German athletic chain Runners Point for $94 million, a move it hopes will greatly expand its presence in Europe.

Wholesale Gainers and Losers

Brown Shoe (BWS)) was the top performing manufacturing stock for the fourth month in a row, rising 20.4% in the month to $20.80, after the footwear retailer turned in an adjusted profit of $0.32 per share, a dime above estimates, despite a 1.6% fall in revenue to $588.7 million, thanks to successful cost-cutting and margin improvement efforts. The company sold its Avia and Nevados footwear brands to Galaxy Brand Holdings for $74 million.

Perry Ellis International (PERY) gained 20.3% to $21.11 after the apparel company topped Wall Street profit predictions with a 17% increase in net income to $11.3 million, or $0.74 per share, compared to $9.7 million, or $0.74 per share, in the prior-year period. Sales dipped 1% to $262.3 million, below analyst predictions of $265.8 million.

Quiksilver (ZQK), rose 17.3% to $7.87, after the company announced an aggressive multi-year profit improvement plan designed to strengthen its Quiksilver, Roxy and DC brands, grow sales and improve operational efficiencies.

Guess? (GES) leaped 14.8% to $31.78, after the company announced first-quarter profit of $0.14 per share, topping the $0.08 per share analyst consensus estimate. The company also enjoyed a victory in Europe, where a Milan court rejected Gucci’s claim that Guess? was infringing on Gucci’s trademarks.

True Religion (TRLG) rose 13.6% to $31.84 after announcing that investment firm TowerBrook Capital Partners, which has investments in companies including Jimmy Choo and Odlo, would acquire the company for $32 per share, or $826 million. The news set off a flurry of activity among shareholders and law firms intending to conduct investigations into whether the price is high enough.

Polo Ralph Lauren (RL) slipped 2.3% to $175.09 after revealing that quarterly revenue growth of only 1.3% was hurt by fewer deliveries to European department stores. Total sales in the period were $1.64 billion, a bit below the $1.7 billion expected. Net income rose to $1.27 million, or $1.37 per share, from $94.4 million, or $0.99 per share last year, helped by lower cotton costs.

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