Deutsche Bank Weighs In On The Retail Industry Amid Weak Earnings

In a note released Tuesday, Deutsche Bank analyst Mike Baker provided insight to the firm's position on a few notable retailers who missed on their quarterly earnings.

Specifically, the note covered Dick's Sporting Goods DKS, The Home Depot HD, Staples SPLS, and The TJX Companies TJX.

Looking at the retail industry as a whole, Baker noted that, as expected, inclement weather had a definite impact on the quarters results, in the form of weak sales. Baker, however, suggests there were other issues as well, namely gross margin.

Baker noted that some companies have already seen business come back, but for others he believes it is likely weakness will persist.

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Dick's Sporting Goods
Baker says Dick's did not jump on the bad weather bandwagon and instead blamed structural problems in its golfing department. Golf was down in the high single digits in the first quarter, and Baker sees this trending to the low teens into the second quarter.

There is a silver lining, however. Baker explained the decline is due to an average selling price issue from a "glut in inventory." Baker believes that once the glut is cleared, "business could stabilize." However, he did note that clearing the glut is likely to hurt margins.

Deutsche Bank currently has Dick's rated as a Buy with respective EPS estimates for 2014-2016 of $2.69, $2.81, and $3.25.

Home Depot
Home Depot appears to be the exception to the rule. Baker applauded the company's ability to hold margins "better than most." Additionally, Baker noted that based on April's 2.8 percent comp in the U.S. and continued strength into May, investors were convinced that Home Depot's misses were mostly weather related.

Baker views home centers as a "relatively attractive space in hardlines" due to the competitive structure and cash flow metrics.

Deutsche Bank currently has a Hold rating for Home Depot. Baker points to Home Depot's competitor Lowe's LOW as having more upside and currently rates it as a Buy.

Staples
Baker wrote Staples sales held up "reasonably well" for the quarter, but is concerned with the company's margins. He noted that both Staples gross and operating margins continue to decline.

Baker believes investors may give the company a little credit for its restructuring plan, but only if it can provide "tangible evidence in the numbers."

Deutsche Bank is maintaining a Hold rating for Staples. Shares for the company plummeted over 12 percent after Tuesday's close and are trading around $11.69.

TJX Companies
Baker appears a little optimistic on TJX. He acknowledged that the company's comps were weak for the quarter, but sees it as a "short-term weather issue." To support this, Baker pointed out that comps were starting to come back towards the end of the quarter.

Baker named TJX's Marmaxx division in particular as culprit for weak comps, but was happy to see the divisions margins remain flat over the quarter.

Deutsche Bank is maintaining a Buy rating for TJX and has adjusted its fiscal year 2014 and 2016 EPS estimate down to $3.17 from $3.21 and $3.65 from $3.72, respectively, based on a more cautious stance in regard to gross margins.