Retail Stocks: 3 to Shop, 3 to Drop

Recent overall strength doesn't mean all retail stocks are worthy

   

“There is only one boss — the customer,” Sam Walton once said. “And he can fire anybody in the company from the chairman on down, simply by spending his money somewhere else.”

Times have changed, but the Wal-Mart (NYSE:WMT) founder’s wisdom endures. And retailers that remember “the customer is always right” have a better shot of beating the competition and boosting shareholder value.

The good news for investors in retail stocks: Shoppers continue to spend money despite the economic uncertainty. This week’s reports that retailers like Wal-Mart, Target (NYSE:TGT), Kohl’s (NYSE:KSS) and Toys ‘R’ Us will hire tens of thousands of extra holiday workers is great news for a sector that was sacked during the recession.

Better yet, last month’s stronger-than-expected back-to-school shopping drove August retail sales to their highest level since March. Sales grew by an unadjusted, year-over-year rate of 3.8% last month, according to data from the National Retail Federation (NRF).

The bad news: Despite the healthy growth in August, the seasonally adjusted sales rate remained flat. NRF Chief Economist Jack Kleinhenz also warned that consumers “remain cautious about their discretionary expenditures.” For retailers, success means giving customers the quality they want at a price they like.

A similar value proposition holds true for retail sector stocks. Same-store sales growth — sales at stores open one year or more — is a key metric to monitor when choosing to invest in a retail stock. But the price and fundamentals need to be right, too.

For example, shares of two of the industry’s recent outperformers, designer-discount retailers TJX (NYSE:TJX) and Ross Stores (NASDAQ:ROST), have risen about 70% over the past year. But they’re also trading at 17 times earnings — a premium price that alters the overall value proposition.

Because shareholders are the ultimate bosses in Corporate America, here are three retail stocks to shop and three to drop right now:

Shop

Kohl’s. The department store chain reported same-store sales growth of 3.4% last month, blowing away Wall Street expectations of 1.9%. The company plans to add 52,700 workers for the holiday season — up markedly from last year’s 40,000. KSS is doing a good job of targeting its marketing and promotions toward shoppers who use cash instead of credit.

With a market cap of $12.2 billion, KSS is trading around $51.50 — about 22% above its 52-week low in July. The stock has an attractive forward P/E of 10 in an industry that averages in the 15-16 range and a price-to-earnings growth (PEG) ratio of 1, which indicates it’s fairly valued. KSS has a one-year return of 14% and offers a current dividend yield of 2.4%.

Macy’s (NYSE:M). Macy’s leveraged its multichannel retailing strategy to boost same-store sales by 5.1% in August. The chain, which includes the Macy’s and Bloomingdale’s brands, expanded online sales by more than 37% during the month. The company also has Web partnerships in China and is boosting its mobility strategy.

With a market cap of nearly $15.5 billion, M is trading around $38 — 57% above its 52-week low this time last year. The stock has a forward P/E of just 10 and a PEG ratio of 0.9, indicating it’s slightly undervalued. It has a one-year return of 51% and a current dividend yield of 2.1%.

Nordstrom (NYSE:JWN). JWN hiked same-store sales by a whopping 25.2% in August, aided by a shift in the timing of its annual Anniversary Sale Event. The retailer, which has delivered online sales growth of 35% over the past three fiscal quarters, will invest $1 billion to beef up its e-commerce infrastructure over the next five years.

With a market cap of $$11.2 billion, JWN is trading around $56 — 26% above its 52-week low last December. The stock has a forward P/E of 14 and a PEG ratio of nearly 1.3, indicating it’s slightly overvalued. The stock has a one-year return of 23% and a current dividend yield of 1.9%.

Drop

JC Penney (NYSE:JCP). CEO Ron Johnson’s “Genius” makeover at the 110-year-old department store chain continues to lose IQ points — and same-store sales. In the second quarter, that critical measure plummeted nearly 22%, despite lower prices and gimmicks like free haircuts. Although JCP’s in-store specialty boutiques are outperforming the rest of the store, Johnson’s attempt to “retrain” customers flies in the face of Sam Walton’s wisdom, as InvestorPlace’s Alyssa Oursler witty “open letter” to the chain illustrates.

With a market cap of $5.45 billion, JCP is trading around $25, about 40% below its 52-week high in February after the company launched its new strategy. The stock has a forward P/E of nearly 19 and a negative PEG ratio because JCP is still losing money (it has an EPS of –2.51). The stock has a one-year return of –2%. And the current dividend yield of 3.1% still isn’t enough to offset the challenges JCP faces in the near term.

Saks (NYSE:SKS). For the record, I love Saks — particularly the clothes, shoes and handbags. But I don’t like the stock right now. SKS announced last month it would no longer report monthly same-store sales and Chairman and CEO Stephen Sadove is getting rid of discounts after last December’s 60% to 70% blowout clearances.

Theoretically, ending discounts will boost profit, margins and even revenue. And price-resistant, high-end customers account for only 20% of total customers but 80% of total sales. Still, here’s the problem: An end to the Bush-era tax breaks will make Saks’ target audience feel poorer. And if the “fiscal cliff” reignites a deep recession, SKS could see a repeat of the 28% same-store sales hit it took in 2008.

With a market cap of $1.62 billion, SKS is trading around $11, about 10% below its 52-week high in April. Shares were down about 2% on lighter-than-average volume Tuesday. The stock has a forward P/E of 18 and a PEG ratio of nearly 1.4, indicating it’s overvalued. I’m not convinced that Saks can sustain its one-year return of 18% if the economy slows further. The stock doesn’t pay a dividend.

Bed, Bath & Beyond (NASDAQ:BBBY). BBBY’s recent acquisitions of Cost Plus and Linen Holdings (for $550 million and $105 million, respectively) muddied the waters a bit when the company reported a 2.2% slip in second-quarter earnings last week. I’m most concerned about the drop in same-store sales growth to 3.5% from 5.6% for the same quarter last year.

BBBY has a strong bricks-and-mortar presence, but it faces a growing threat from online competitors like Casa.com, a part of Amazon (NASDAQ:AMZN) subsidiary Quidsi’s family of sites. Casa shoppers receive free, two-day shipping if they spend just $39 and can combine purchases from Diapers.com and four other sites to hit the free-shipping level faster. That, combined with robust performance by competitors like upscale kitchen supply firm Williams-Sonoma (NYSE:WSM), poses a significant threat to BBBY.

With a market cap of %14 billion, BBBY is trading around $62 — 18% below its 52-week high in June. Although the stock’s forward P/E of 12 looks attractive and the PEG ratio of 1.2 isn’t bad, I think margin pressure and fierce competition will eat away at BBBY’s one-year return of 9%. Since the stock also doesn’t pay a dividend, I think choosy investors have some better options now.

As of this writing, Susan J. Aluise did not hold a position in any of the stocks named here.


Article printed from InvestorPlace Media, http://investorplace.com/2012/09/retail-stocks-3-to-shop-3-to-drop-2/.

©2014 InvestorPlace Media, LLC

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