The clothing industry is very cyclical, usually peaking in the summer months of June and July, and again during the Christmas season. Consequently, the share prices for industry players also tend to reach their highs during these periods, and then trough in the interim months. Therefore, in the run-up to fourth quarter earnings report, one would expect share prices to appreciate over the coming months in line with shareholders expectations. One potential factor which might slow this appreciation is that consumer spending remains low. This is due to continuing unemployment and a lack of consumer confidence, factors that are not helped by the current government crisis.
Background I have chosen Macy's, Inc. (NYSE:M) as my cyclical clothing company to invest in, as its returns have been very consistent over the last couple of years, which should make it easy to predict its Christmas returns. During the fourth quarter, Macy's revenues tend to increase by roughly 50% from approximately $6 billion to $9 billion, while its net income increases by a factor of four from approximately $300 million to around $1.2 billion. Therefore, the 3rd quarter could easily be characterized as the "calm before the storm" as revenues drop off while customers save for the Christmas season.
I believe that this lull has already been priced in, as since June the share price has dropped from a high of $50.77 to its current price of $42.64. Although Macy's reports its third quarter earnings a month from now on Nov. 13, I believe that knowledgeable investors will already start to acquire the company's stock before then in anticipation the share price boost from the upcoming months of high demand and large sales. Consequently, buying while everyone else is fearful definitely applies in this scenario. The key to making a solid investment is looking ahead and anticipating rather than clutching the coattails of a price rise. I would note that this is a short-term play and not a long-term investment, and consequently I will be withdrawing my interest in the stock come December.
Among others, Macy's primarily competes with Kohl's Corporation (NYSE:KSS) , Sun Art Retail Group, and Marks & Spencer Group . All three companies generally have high earnings compared to the typical retail stores, and all are profitable retail stores. As such I believe that they are good companies to compare Macy's to.
Out of these three, Kohl's is possibly the retailer store most similar to Macy's. Kohl's has many of the same advantages as Macy's, though its rapid growth is now starting to affect the company. The firm seems to have too many stores, and consequently is oversatisfying demand, which might lead to loses over the long term. Kohl's also has another huge disadvantage when competing with Macy's: the Macy's brand is significantly more recognizable and has a much larger reach, along with a very loyal customer base.