RAMCO Weekly Jun. 16, 2015

Paul Resnik operates Resnik Asset Management Co. (RAMCO), a registered investment advisor. 

Overview

Stocks were about as mixed as the news last week with the Dow Jones Industrial Average finishing up 49.38 points (0.28 percent), the S&P 500 Index inching higher by 1.28 points (0.06 percent), and the Nasdaq Composite slipping 17.36 points (0.34 percent). While there has been a lot of up and down in the market, we would note that the S&P 500 hit an intraday high of 2093.55 on December 29, 2014 and closed at 2,094.11 on Friday. As for the news, stocks were buoyed by the report that retail sales rose 1.2% in May, confirming expectations of a strong snapback after a flat number in April, but enthusiasm was curtailed on Friday by Congress' failure to vote for a worker-aid program that was a key part of the fast-track trade bill (that program is part of the legislation passed by the Senate). In addition, optimism about an agreement between Greece and the European Union was dealt a blow when International Monetary Fund left negotiations on Thursday saying that "major differences" remained "in most key areas."

In the News

Sears Holdings (SHLD-28.07) Rearranging the Deck Chairs

Sears Holdings reported a loss of $303 million, or $2.85 per share, in the April quarter compared with a loss of $402 million, or $3.79 per share, a year earlier. Selling and administrative expenses declined to $1.68 billion from $2.09 billion, but revenue fell to $5.88 billion from $7.88 billion. Sales at Sears' domestic locations open at least a year dropped 14.5 percent, while sales at Kmart domestic locations open at least a year declined 7.0 percent. The Company also announced that it expects the real estate investment trust that it is forming, Seritage Growth Properties, is being declared effective by the Securities & Exchange Commission. Sears is planning to sell and lease back about 235 properties, most of them Sears and Kmart stores, to the REIT. The Company expects $2.6 billion in proceeds. The chain closed more than 200 Sears and Kmart stores in 2014. Sears is trying to extract value from its real estate holdings and replenish its cash as it tries to turn around its retail business. The Company is also selling some of its assets such as the Lands' End clothing business. However, the latest report shows the big challenges that continue for billionaire hedge fund manager Edward Lampert, who is Sears Holdings' CEO and chairman, in turning around the Company. Lampert combined Sears and Kmart in 2005, about two years after he helped bring Kmart out of bankruptcy. The combination has proved unsuccessful, and the Company, known for shabby stores, has been slow to compete with the chains like Wal-Mart, Home Depot and Best Buy, which have been updating their locations. Sears finished its January 2015 fiscal year with its eighth annual revenue drop and its fourth annual loss. The stock was off 24% for the week.

Krispy Kreme Doughnuts (KKD-19.81) Dow

Krispy Kreme reported fiscal first quarter (ended May 3) adjusted EPS of $0.24, up slightly from $0.23 in the year-earlier period and the average analyst estimate of $0.22. Revenues rose 9% aided by the addition of espresso and smoothie drinks and a 17% increase in the number of stores to 1,003. The Company is focused on opening smaller stores that don’t make doughnuts on the premises and are cheaper to build. It also plans to enter six new countries in the coming year. Krispy Kreme adjusted its January 2016 fiscal year EPS guidance to a range of $0.80 (previously $0.79) to $0.85 vs. $0.70 in fiscal 2014. The stock rallied 16% last week.

The Week Ahead

This week's economic data is expected to show a snapback in May in industrial production and a pickup in leading economic indicators. In addition, reflecting a bounce in energy prices, the Consumer Price Index is forecast to a show a sharp 0.5% increase. The earnings calendar will remain light although Wednesday's releases by Oracle and FedEx will be watched for signs of broader economic trends. The Federal reserve will issue its policy and statement and release a summary of its economic projections after its regularly scheduled two-day meeting ends on Wednesday. Although no major policy changes are expected (future policy shifts will likely remain "data dependent"), the assessment of economic activity could indicate a more positive outlook that may raise expectations of a federal funds rate increase in September. Greece failed to make an International Monetary Fund loan repayment due on June 5 and is not expected to make one scheduled for June 18. Originally planned to be made in four installments in June, Greece has indicated it now has a goal of making one payment (of $1.6 billion euros) on June 30. Greece's latest proposal was summarily rejected by creditors over the weekend. It may not be possible to miss the June 30th payment without acknowledging that Greece is in default on its debt. The Treasury auctions scheduled for this week are on: Monday: $24 billion three-month bills and $24 billion six-month bills; and Thursday: $7billion 29-year, eight-month TIPS.

Resnik Asset Management Co., Inc. 69 Fairfield Road, Yonkers, New York 10705 (914-423-5733)