2 Retailers for Your Holiday Stock Shopping

by Will Ashworth | November 14, 2012 10:40 am

2 Retailers for Your Holiday Stock Shopping

With 23 million Americans looking for work, even seasonal jobs have become highly sought after. So, it’s good news that 36% of retailers are hiring extra seasonal help this year, and 39% plan to keep some of those workers permanently. To highlight this trend, Forbes has put together a list of the top 10 firms hiring seasonal help[1]¬†during the holiday rush.

Of that group, which would be worth hiring from an investing point of view? I’ll pick two I think make good investments based on the quality of their businesses combined with the success I think they’ll have in retail’s biggest season. Let the shopping begin.

The best of the 10 retailers as far as I’m concerned is Gap (NYSE:GPS[2]), which under the patient leadership of CEO Glenn Murphy has clawed its way back into the hearts and pocketbooks of consumers everywhere.

For the first nine months of fiscal 2012, it’s increased same-store sales 5% year-over-year with the only blemish being its international business, which is down 4%. Gap is opening more than 1,100 stores for business on Thanksgiving Day, and almost 1,500 will be ready to go for its Black Friday midnight opening. Its legacy Gap brand will run a 60%-off sale storewide from Tuesday, Nov. 22, through Thanksgiving weekend.

I expect Gap’s North American business across all brands to hit a home run during the holidays. Analysts estimate fiscal 2012 earnings per share of $2.27. Having surprised in each of the last four quarters, it’s very possible the number will be closer to $2.40 a share.

What’s different about the Gap these days?

It has completely restructured itself. In October it announced it was aligning its business globally across its largest brands: Gap, Banana Republic and Old Navy. Each division will have its own global president handling all aspects of the brand from online sales to international expansion to franchising.

In addition, a fourth division called Innovation, Digital Strategy and New Brands has been created to help keep all the brands old and new growing through social media, etc. Athleta, a brand I feel holds enormous potential for Gap, along with Piperlime, goes under the fourth and final division.

Finally, Gap’s expansion in China will be directly overseen by Murphy himself. Obviously, Gap sees a huge opportunity there, and given the CEO’s full attention, I see good things happening overseas.

Gap is selling quality clothing at reasonable prices. The public is noticing, and sales are growing. CEO Murphy has the team and structure in place to take Gap to the next level. Five years from now, $33 will seem extremely cheap.

My second pick is Macy’s (NYSE:M[3]), which reported strong third-quarter earnings Nov. 7. It raised its full-year earnings guidance to between $3.35 and $3.40 a share, up a nickel from its previous guidance in early August. It expects fourth-quarter same-store sales to grow 4.2%, despite Hurricane Sandy, and full-year same store sales to rise 3.9%.

If the holiday season proceeds as expected, Macy’s will deliver its 12th consecutive quarter of increased sales and earnings and three straight years of growth.

What’s its strategy for the holidays?

Macy’s finished the third quarter with inventory up 0.7% sequentially and flat year-over-year. It purposely went into Q4 light on inventory. Its plan is to refresh the shelves more often over the next few weeks to maintain a level of newness for customers. It believes that will keep the cash registers ringing throughout the holidays while also keeping inventories low and gross margins higher.

If it’s able to hit its 4.2% estimate for Q4, I’d expect its $1.94 Q4 EPS estimate at the low end to be very conservative. Should you own Macy’s stock?

If forced to choose between it and Nordstrom (NYSE:JWN[4]), most money managers would probably go for the latter because its Rack stores do a good job of attracting discount customers without taking much, if any, business away from its full-line stores.

At current prices, I’d consider Macy’s as a fair value with definite long-term appreciation potential. Its online business is growing tremendously, thanks to an omni-channel strategy that gets the goods into the hands of its customers regardless of whether a product is available in the store. In the years ahead, successful retailers will be those who have strong e-commerce operations. Macy’s is almost there.

It’s a wildcard pick.

Two other retailers on the Forbes list are worth mentioning: JC Penney (NYSE:JCP[5]) and Toys ‘R’ Us. Vornado Realty Trust (NYSE:VNO[6]) owns 10.7% of Penney and 32.5% of Toys ‘R’ Us. The toy retailer will likely go public at some point next year, and big investor Bill Ackman continues to support Ron Johnson’s down-and-out department store[7] as it struggles through its makeover. Both could end up being nice contrarian bets — and you get a whole bunch of real estate to boot.

As of this writing, Will Ashworth didn’t own any securities mentioned here.¬†

Endnotes:
  1. top 10 firms hiring seasonal help: http://www.forbes.com/sites/susanadams/2012/11/06/whos-hiring-the-most-this-holiday-season-2/
  2. GPS: http://studio-5.financialcontent.com/investplace/quote?Symbol=GPS
  3. M: http://studio-5.financialcontent.com/investplace/quote?Symbol=M
  4. JWN: http://studio-5.financialcontent.com/investplace/quote?Symbol=JWN
  5. JCP: http://studio-5.financialcontent.com/investplace/quote?Symbol=JCP
  6. VNO: http://studio-5.financialcontent.com/investplace/quote?Symbol=VNO
  7. Ron Johnson’s down-and-out department store: http://investorplace.com/2012/11/7-reasons-j-c-penney-is-just-plain-ugly/

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