To say that retailers have had a disappointing year so far would be a mild understatement. Things started off rather promising, with the benchmark exchange-traded fund for retail stocks — SPDR S&P Retail (XRT) — climbing up 6% during the first three months of 2015.
However, the retailers ETF was sucked into a narrowly defined consolidation range before eventually plummeting along with the broad equity indices in late August.
Although the retailers ETF has moved beyond its lows incurred during the depths of the most recent market crash, it hasn’t done so with much conviction. Since August 24, the XRT has only gained about 3%, whereas the blue-chip fund SPDR S&P 500 ETF Trust (SPY) has had a far better run in the markets, returning 10% during the same time frame.
Unusual events, particularly harsh weather patterns, record-breaking dollar strength, and logistical disruptions caused by labor disputes, stymied income streams for many retailers. It wasn’t until sales data became available for the month of March that the economy showed any signs of life. Additionally, the University of Michigan‘s consumer confidence index — which has been declining since January — demonstrates that Americans have generally felt skittish.
While a dramatic reversal in sentiment may not be imminent for the middle-class, there are indications that retailers that service the more affluent may be able to turn their fortunes around. The Wall Street Journal reported earlier in the year that high-end malls posted record sales, primarily due to the presence of luxury or technology retailers.
With earnings season in full swing, these three premium-brand retail stocks just might have what it takes to buck an otherwise disappointing sector trend.
Retailers to Buy: Nordstrom (JWN)
The shifting currents of the markets can often catch even the most veteran of investors off guard. Just ask shareholders of Nordstrom, Inc. (JWN). In 2014, JWN stock returned nearly 31% gains. In contrast, 2015 erased most of the optimism with a year-to-date loss of more than 20% — thanks in no small part to a sudden collapse of 5% under heavy volume on Nov. 9.
Granted, JWN stock was a bit top-heavy in the markets, but with the broad decline in its overall price level since late-March, Nordstrom looks like a compelling buy.
Trailing revenue and net income trends indicate that JWN is on pace to exceed last year’s results for both metrics — a fairly significant achievement by its own right considering the difficult atmosphere for retailers. On the balance sheet, JWN chipped away significantly on its long-term debt, boosting the company’s implied financial health.
For its upcoming third-quarter earnings report — which is scheduled for release on Nov. 12 — JWN is expected to post earnings of 73 cents per share, a modest 3% increase from its year-ago target. Given Nordstrom’s overall increase in revenue per share combined with net margins that have stayed reasonably stable over the last several quarters, it would not be unreasonable to expect JWN stock to at least hit its current EPS target.
Although the markets have been unkind to JWN recently, there are enough positives fundamentally for investors to consider a longer-term stake.
Retailiers to Buy: Dillard’s (DDS)
Beauty is in the eye of the beholder, but does that extend to financial investments? That’s the two-sided story shareholders of Dillard’s (DDS) will have to wrestle with.
On one hand, Credit Suisse analysts have upgraded the ranking of DDS stock from “underperform” to “neutral,” citing a decline in bearish momentum. On the other hand, technical analysts from TheStreet issued a 20% downside risk target, citing the lack of a definitive reversal pattern. One thing these two divergent assessments can agree upon is that retail stocks face significant challenges ahead.
While that may be true for many retailers — especially those dependent on sales volume over profitability — Dillard’s makes a strong case for its self compared to its competitors. Both operating and net margins for DDS are ranked much higher than the average for retail stocks, contributing to earnings growth in recent months.
EPS on average increased more than 4% year-over-year in the first two quarters of FY2016. This has also contributed to DDS being decidedly undervalued, with a price-earnings ratio that is roughly half that of the median for retailers.
Despite these strong attributes, Wall Street analysts have taken a more cautious approach for Dillard’s Q3 FY2016 earnings report. Consensus targets for DDS stock EPS are set at $1.25 — right down the middle between its absolute high and low estimates. It also happens to be the same EPS target from Q3 FY2015, which should be easily met considering Dillard’s steady revenue growth over the past two years.
Ultimately, with DDS stock down more than 30% YTD, now may be an ideal time to take a chance on Dillard’s, especially in light of its relatively robust fundamentals.
Retailers to Buy: Bebe Stores (BEBE)
There are depressed retailers fighting against macroeconomic headwinds, domestic uncertainties and declining foot traffic … and then there is Bebe Stores (BEBE).
At first glance, there seems to be little reason why investors would want to consider BEBE stock. Shares are down more than 50% YTD, and BEBE stock has sunk 85% over the past five years. Nominally, BEBE shares are at a dollar as of this writing — in sharp contrast to its premium branded clothing and fashion accessories.
Despite a string of bad performances in the markets and upside down operating margins that continue to put net income in the red, there are some positives that make BEBE more than just a wild penny stock. Unlike the other high-end retailers mentioned in this article, Bebe Stores has no debt — a huge advantage, particularly as we appear headed towards an era of rising interest rates.
In addition, BEBE has been making a concerted effort to keep its costs and inventory levels in check relative to its revenue stream.
Earnings-wise, its Q1 FY2016 report is a tough one to call. Over the last year-and-a-half, BEBE’s actual results have been very spotty against analysts’ expectations. However, BEBE should be able to meet Wall Street’s forecast for a 16-cent loss. In the past four quarters, average earnings came out to a loss of 12 cents per share — a hefty improvement over the 23-cent loss average between Q1 FY2014 and Q4 FY2014.
At the end of the day, BEBE stock, in light of its positives, is one of the more volatile retail stocks in the markets. Nevertheless, it has some underappreciated strengths which could make it one of the biggest surprises among publicly traded retailers.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
