In February 2009, retailers Kohl’s (KSS), Macy’s (M), Nordstrom (JWN) and Saks (SKS) were being suffocated under the pillow of petrified consumers clinging to their wallets with a near death grip. Not surprisingly, the share prices of all these stocks had just taken a big hit, and the outlook for department store retailers looked bleak.
But a funny thing happened in the succeeding 12 months. Kohl’s shares jumped 50%, Macy’s surged 130%, Nordstrom vaulted 190% and Saks shares skyrocketed an amazing 317%. That’s some serious share price appreciation, especially considering it happened in the midst of the worst recession since the 1930s.
But how long can this run last? While the gains in the sector may continue, especially considering the improved consumer sentiment, even the most optimistic bull will likely have a hard time projecting the kinds of gains these stocks have seen over the past 52 weeks. Of course, not all department store retailers are created equal, so let’s take a closer look at each one now.
Kohl’s (KSS) caters to middle-income consumers, a group that’s been hit particularly hard during the recent recession. But despite serving this challenged demographic, the company just posted better-than-expected January same-store sales. That metric rose 6.5% in the month, more than double the 2.8% analysts were anticipating. Kohl’s also raised its fourth-quarter earnings target. Analysts polled by Thomson Reuters set an EPS target of $3.19 for 2010 and a target of $3.63 for 2011. KSS shares currently trade at $51.74, which means the stock now trades at 16.2 times this year’s earnings. The consensus price target for the stock over the next 12 months is $64.39, a target that is quite achievable if the economy continues improving for middle-income shoppers.
Macy’s (M) stores, which includes the upscale Bloomingdale’s chain, caters to a higher-income demographic than Kohl’s. But like Kohl’s, the company blew through its January same-store sales estimates with an increase in the metric of 3.4%. Macy’s also raised its fourth-quarter profit outlook. Analysts polled by Thomson Reuters set an EPS target of $1.34 for 2010 and a target of $1.57 for 2011. Macy’s shares currently trade at $18.51, meaning the stock trades at just 13.8 times 2010 earnings. The consensus price target for the stock over the next 12 months is $21.23. At 2010 valuations, Macy’s can easily best this rather conservative 12-month price target. And while it’s highly unlikely Macy’s shares will surge another 130% over the coming year, look for the shares to climb much higher than Wall Street estimates.
January same-store sales for Nordstrom (JWN) increased a whopping 14% — more evidence that luxury retailers are back. Analysts polled by Thomson Reuters set an EPS target of $1.95 for 2010 and a target of $2.41 in 2011 for the retailer. Nordstrom shares currently trade at $35.83, meaning the stock trades at 18.4 times 2010 earnings. The consensus price target for JWN stock over the next 12 months is $41.47, which is over a 15% gain from here. If the stock can get there, it would represent a very nice move up, but as long as high-end consumers keep spending their cash on upscale goods, Nordstrom shares could definitely eclipse this mark.
Like all of our department store retailers, Saks (SKS) also had a strong January with same-store sales jumping 7%. The Street once again underestimated shoppers’ voracious appetites, as analysts were only expecting an increase of 2.8%. Analysts polled by Thomson Reuters have set an EPS target of a loss of $0.42 for 2010 and a target for a loss of $0.18 for 2011. The consensus price target for the stock over the next 12 months is $6.38, but interestingly, shares currently trade at $7.12. After the year Saks has had (remember that 317% surge in the shares), it’s no surprise that the Street sees the stock as vulnerable. In fact, out of the four department store retailers profiled here, this is the one stock investors should proceed toward with the greatest amount of caution. Yes, Saks could continue shocking the Street with their turnaround story in 2010, but SKS will most likely struggle to keep the buyers coming in.
Next week, investors will get a much clearer picture on these stocks, as all four department store retailers are scheduled to report their fourth-quarter earnings results. Will the numbers bode well for the sector going forward, or will they disappoint? That’s the answer all retail sector investors will be shopping for.
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