This is How to Hammer Out Sector Analysis

To have a shot in successfully analyzing a sector that literally changes every single day (that would be retail), one has to see the stores in a way that others don't. Then, one has to take their giddy inducing secret list and bolt it onto things mere mortal investors are missing in the market and on individual companies. So, here is a list, my intense investor friends, of notes that I guarantee won't be in any sell-side research report tomorrow or this time next week. Sweat the details, think outside the box, draw linkages…that is the recipe winners use. •Wall Street was expecting a rebound in sales in the final week of September, but given the headline misses for many companies, this obviously failed to materialize. This tells me: when JC Penney (JCP) says it was unable to get people back into its stores post peak back to school all the blame for that can't be shoveled on CEO Ron Johnson's new “fair and square” pricing scheme, it's a reflection on the economy. Consumers are maintaining their pattern of splurging when they must, stuff money under the mattress when not required to do so. •Generally, inflation in food is still not playing out (using Costco and Target as proxies). I think it will play out for the holidays. •Apple iPhone 5 effect may be a culprit for assorted sales misses, but obviously there is no precise way to measure this. •Victoria's Secret strong merchandise margin gains at the store and online levels likely marks the start of the cotton cost deflation benefit for specialty retailers. If Victoria's Secret call outs are any indication, those companies that are on trend and driving traffic could surprise on earnings for the holidays (such as my top teen apparel pick American Eagle Outfitters). •Macy's (M) tighter integration of its online inventory with its store inventory may be siphoning sales from the store (much more variability in Macy's overall comps of late, can't all be due to NYC flagship remodel; online +39% in month). Watch for this at other retailers focusing on “omnichannel retailing.” •Demand trends amongst low income consumers (think $40,000 and under annual income) mildly disturbing. Cato (CATO) guided to low end of their earnings guidance range, Fred's (FRED) had sales declines in discretionary categories. Even a Family Dollar (FDO) gaining incremental sales growth sequentially is a sign of more “trade in” consumers, or higher income non-dollar store traditionalists, looking for ways to trim the budget. •Kohl's (KSS) had a very disappointing month (have not been a fan of stock in any shape or form) after the bulls bid up the stock on hopes new merchandise flows would improve results. I think Kohl's month nicely demonstrates prior months of weakness in the manufacturing sector (stores are mostly in Midwest). BTW, inventory too elevated (+9%) exiting the back to school season.