We have spent some time in this space debating the potential benefits of lower oil for the U.S. consumer and what it means for corporate profits in an environment where the dollar has surged. Yesterday’s price action in some retail really drove home the point we have been trying to make, that for those who expect to get a good bit of their sales from outside the U.S. the benefit of lower oil for input costs, and the positive effects on U.S. consumers can be outweighed by the decrease in profitability overseas. Case in point, Ralph Lauren (RL) which declined 18% on the day after the company missed and guided down citing currency headwinds, among other things:
From a purely technical standpoint, the stock is below $140 which has been support 3 years. So the chart has a precarious look to it if it can’t find its footing here, with what looks like a massive head and shoulders top. RL gets a third of their sales from outside North America, and much of their expected growth.
On the flip-side, Costco (COST) largely a North American company, benefits from lower input costs. Their customers benefit from lower gas at the pump and face minimal headwinds from dollar strength. Investors have watched as the stock exploded to new all time highs on massive volume following Friday’s announcement of a $5 special dividend:
And then there is Kohls (KSS) yesterday. KSS gets 100% of their sales from the U.S. The stock rallied 6.3% on better than expected Q4, breaking out to new 52 week and 7 year highs, also on massive volume:
SO all retailers are not created equal in the lower oil / strong dollar environment, one that we could be in for a while. Domestic focused stocks seem like the place to be, but I would add that the smart money has been in this second derivative trade for a while, and chasing stocks like COST which trades at 30x expected 2015 expected earnings growth of 11% could be a hard way to play going forward.