Wal-Mart: Recession Shows Claws

Lower-than-expected December sales dinged Wal-Mart Stores (WMT) shares Thursday amid shaken investor beliefs about the recessionary resilience of the world's largest retailer.

Same-store sales grew 1.7% last month, less than Wall Street's forecast of 2.8% and at the lower end of the company's 1% to 3% range. The company also cut its fiscal fourth-quarter earnings estimate to between 91 cents and 94 cents a share from $1.03 to $1.07.

It wasn't just a recession that hit consumer spending -- bitter cold and snowstorms across the country ate into sales. The company reported that 40 stores were forced to close from two hours to as long as nine days in the run-up to Christmas.

"Due to the difficult economy and severe winter weather in some regions, the holiday season was more challenging for retailers than expected," Vice Chairman Eduardo Castro-Wright said in the sales announcement.

Staple merchandise categories such as groceries and health-care products were strong, but clothes and jewelry sales were particularly weak, the company said.

Jefferies & Co. analyst Daniel Binder wrote in a Tuesday preview note that heavy promotions would cut into quarterly earnings. Wal-Mart was largely successful in starting its holiday sales campaign early, which may have accelerated some purchases and affected December sales.

But Jaison Blair, an analyst with Rochdale Securities, says Thursday's drop stems from unrealistic expectations from frightened investors. After all, most of what the company sells is nylon, not bulletproof Kevlar.

"We have been arguing that the investment community has been treating this stock as a safe haven," he says. "There's a perception that you can't get fired for owning Wal-Mart. In this environment, it's dangerous to call any company a defensive safe haven."

He says expectations remain too high, and that its long-term growth prospects, particularly internationally, aren't going to pay off the way increasingly desperate investors believe.

Bottom Line: Buy
This dip erodes some of the premium valuation in the stock. While Wal-Mart isn't bulletproof, it's still worth picking up, though investors should be ready to unload it if it looks like consumers are going to cut back even further in a longer, deeper recession.

Sears: Bucking Retail's Woes

Shares of Sears Holdings (SHLD), the parent company of the Sears and Kmart chains, jumped sharply after the company forecast better-than-expected fiscal fourth-quarter results.

Analysts expected earnings of $1.90 a share, but Sears, despite a same-store sales decline of 7.9% for the quarter ended Jan. 3, projected profits between $2.44 and $3.09 a share.

The unexpected forecast got the attention of retail sector observers, who were already thrown by lower-than-expected sales figures for Wal-Mart Stores, a chain seen by many investors as recession-proof.

"It's kind of surprising that [Sears] was more positive than Wal-Mart," says Doug Roperts, chief investment officer at Channel Capital Research, a Shrewsbury, N.J., investment firm. "I would have thought it was going to be the reverse."

Indeed, many short-sellers probably believed the same thing, meaning part of Sears' largest one-day gain in five years was linked to a short squeeze, as investors betting against the company has to unload short positions. As of Dec. 10, about 14.8% of the company's shares were held short, a decline from the previous month but still a significant percentage of the public float.

"It's probably a pretty good notion that there's some short covering there," Roberts says.

Expectations had been particularly low for Sears, which remains a question mark to many investors under the stewardship of hedge fund mogul Edward Lampert.

"While we think the company is taking the right steps to navigate this challenging retail environment by closing underperforming stores, paring back inventory levels, and cutting costs, we believe its weak competitive position and its heavy exposure to product categories related to the home (e.g., appliances) make it more vulnerable than many peers in these uncertain times," Morningstar analyst Kimberly Picciola wrote Dec. 2.

Bottom Line: Sell
Take advantage of the big pop and get out, unless you're putting your faith in Lampert rather than the company. "A smart person probably tries to stay out of the way and not do a trade," says Roberts. "You have to be a very nimble trader in terms of this, and if you're not a nimble trader and you think you are, that can be quite disastrous to your wealth."

Thinkorswim: Buyout Makes a Splash

Shares of Thinkorswim Group (SWIM) jumped sharply Thursday after TD Ameritrade Holding (AMTD) agreed to acquire the online options broker in a $606 million deal.

TD Ameritrade will pay $225 million in cash and issue stock equivalent to a 60% premium of Thinkorswim's Wednesday closing price. The acquisition could signal a start to the consolidation of the online brokerage industry, which has suffered during the stock market collapse.

TD Ameritrade, E-Trade Financial (ETFC) and Charles Schwab (SCHW), the three largest discount brokerages, saw their shares fall along with broader stock indexes, mirroring the drop in the S&P 500, and driving away both investors and overwhelmed customers unable to keep pace with the collapse of the equity market.

Michael Vincequerra, an analyst at BMO Capital Markets, said the deal was an attractive long-term move, but called it a strange time to sell out, since Thinkorswim had a recent surge in growth.

"The acquisition will make TD Ameritrade the new industry leader in terms of total options trades a day," he wrote Thursday.

Volume may well be the key to surviving both the current grim market and a more robust future, Morningstar analyst Jason Ren says.

"It's a fast-maturing industry and I'd expect to see more price erosion than there's been in the past," he says. "I expect to see price competition pick up, and I wouldn't be too surprised to see more consolidation."

He says the biggest players remain cash-rich, thus able to do acquisitions: "The synergies that could be potentially realized in this deal could also be potentially realized with another large discount retail broker taking on one of the specialized shops."

Bottom Line: Hold
The bulk of the upside in a merger is rarely available to the ordinary investor, who'd be better served to watch the course of the deal, capitalize on the premium and perhaps look at TD Ameritrade as a long-term play once there's evidence of a real recovery.