Analysis: HON DWDP SLB FIVE M JWN KSS OLLI

The U.S. equity markets are extending recent gains on Friday, climbing higher on reports the U.S. is considering lifting tariffs on China in hopes of an accelerated path toward a trade deal, as well news of China offering a six-year material boost to imports with a goal of wiping out the trade deficit in about six years' time. The next round of negotiations is set to occur in Washington over two days beginning on Jan. 30.

If progress continues and leads to an eventual deal, we would expect to see a rise in several names across the portfolio, including Honeywell (HON) , DowDuPont (DWDP) , the oils and Schlumberger (SLB) , which who reported great cash flow this morning, Apple AAPL of course, and many, many more.

On a different topic, during our monthly conference call (which can be found here) on Thursday, a thoughtful question was submitted by a club member, asking how and why the market cap of Five Below (FIVE) , an upstart discount chain founded in 2002, has increased significantly to the point where it is about $1 billion below that of Macy's (M) , a household department store chain founded more than a century ago. If you compare the year-to-date stock performance of the two companies, you can easily see a divergence in price that has narrowed the market caps of the two companies. Helping to explain the moves are the recent holiday sales figures provided over the past few weeks, so let's explore the two names (as well as a few others) to get a pulse on what is working in retail.

Let's check in on the department stores first.

Macy's provided its November and December holiday sales last week, and the numbers were a big disappointment. Comparable sales came in at +0.7%, falling well short of the +2-3% expectation. Compounding the comparable sales weakness, management also downwardly revised guidance on several 2018 targets such as comparable sales, net sales, gross margin rate, and diluted earnings per share (ex-items). The market's reaction to the numbers was disastrous, as the shares fell 17.69% on the day.

Meanwhile, Nordstrom (JWN) provided its numbers this past Tuesday and fared little better. Overall comparable sales increased 1.3% during the period, a figure that was relatively in line with expectations. However, traffic in Full-Price sputtered as comparable sales increased 0.3% relative to the third quarter year-to-date increase of 1.9%, causing the company to incorporate in its guidance higher markdowns taken during the holiday and to reposition inventory to more appropriate levels. Not good. As a result, management expects EPS to be around the low end of its prior outlook range of $3.55 to $3.65, when excluding the impact of a non-recurring credit-related charge.

For Nordstrom, the holiday season represented another round of inconsistent execution, which we battled with during our 2018 ownership of the stock, but came out victorious due to our exit at $64 for a huge gain (see our Alert here). In reaction to the numbers, several analysts on the sell-side were quick to downgrade their ratings and slash their price targets. Shares dropped 4.76% in reaction to the sales numbers.

How about Kohl's (KSS) ? As we reported last week in our Alert here, the company's shifted comparable sales increased 1.2% for the holiday period, a result that was cheered by the sell-side due to its tough year-over-year comparison, but failed to get the respect of the market. This has since changed as the stock now sits at year-to-date highs. Furthermore, and unlike Macy's and Nordstrom, management raised its full-year adjusted EPS guidance when they narrowed the expected range to $5.50-$5.55 from $5.35-$5.55. A good result given the challenges of peers.

Now let's take a look at a few discount chains.

Five Below provided its holiday sales numbers on Monday and announced net sales for the period increased 24.6% to $526.1 million and 4.9% on a comparable basis. Additionally, management said in the press release that they now expect to slightly exceed their sale guidance while earnings are expected to be at the high end of their range. The shares fell roughly 2% in reaction to the announcement; however, expectations were likely high and this stock has had quite the start to 2019. As of Thursday's close, shares were up more than 17% year to date and they have extended those gains today.

How about Ollie's Bargain Outlet Holdings (OLLI) ? The company announced last week that its holiday period saw total sales increase 16.6%, with a comparable store advance of 7.1%. Based on the holiday numbers, management raised both its full-year sales and earnings guidance. Although the stock finished flat the day of the announcement, OLLI has gained nearly 14% year to date as of Thursday's close.

So, what can we make of the recent holiday season? Look for the stores that are gaining market share. To go back to the original question, Five Below is rapidly increasing its store count across the country, making it the most exciting regional to national story in retail. All the while, management has maintained a pristine balance sheet, too, enabled by the best-in-class return-on-investment the average new store has. Five Below's expansion is similar to Ollie's, which is undergoing an expansion plan of its own. Since 2003, Ollie's has grown from operating 28 stores in three states to 230+ stores in 21 states.

From a department store perspective, Macy's has gone in reverse, closing underperforming stores over the past few years. Meanwhile, improvements to the balance sheet have been made, but the company still carries a hefty amount of debt. Kohl's, on the other hand, benefits from being away from the mall, and is perhaps the greatest beneficiary of store closures of several peers, including Bon-Ton, which announced it would liquidate its stores in 2018. Nordstrom? Their execution is getting far to inconsistent, and higher priced retail did not fare well during the holidays.

Retail and fashion trends can be fickle at times, but we expect our two positions (FIVE and KSS) will continue to benefit from their market-share gaining traits.

Action Alerts PLUS, which Cramer manages as a charitable trust, is long HON, DWDP, SLB, FIVE and KSS.