It’s a no-brainer to say that shoplifting – the bane of all retailers’ existence – is a bad thing. Considering the industry’s narrow margins, a rise in theft is a big problem for retailers’ earnings.
But one industry expert believes a recent rise in retail theft actually may signal good fortune for the industry – a trend, which if true, would benefit investors in big-name stocks like Macy’s (NYSE:M), Nordstrom (NYSE:JWN), Abercrombie & Fitch (NYSE:ANF) and Gap (NYSE:GPS).
Retail fraud and crime cost retailers a whopping $37.1 billion last year, up from $33.5 billion in 2009. To make matters worse, a new survey by the National Retail Federation found that 95% of all retail stores were victims of shoplifting.
But the silver lining in those storm clouds may rest with who’s stealing from the stores and why. Dr. Richard Hollinger, the University of Florida criminology professor who wrote the survey, found that employees were responsible for the vast majority of shoplifting losses last year: employee theft accounted for 43.7% of total retail losses last year.
In a recent interview, Hollinger said greater optimism about the state of the economy has driven employee theft to higher levels. During the recession, employees resisted the temptation to steal because they were afraid of losing their jobs. In 2007, the lowest point of the recession, shoplifting fell significantly.
But as the economy bounces back, employees are more likely to take that five-finger discount. In addition, many employees who survived layoffs during the recession feel a sense of entitlement since leaner retail operations have increased their workloads.
Employees intent on stealing might want to watch retail trends very closely, however. May retail sales slipped for the first time in nearly a year. And consumer confidence in June took a surprise hit, sinking to 58.5% from 61.7%. The reason: consumers were more worried about their jobs.
While loss trends and consumer confidence stats are important for the industry, at the end of the day, retail stocks stand or fall on their fundamentals. Here are two retail stocks that are hot and two that are lukewarm:
Hot:
Abercrombie & Fitch — This specialty retailer’s stock has been on a tear this year, rising nearly 124% since its 52-week low last July. At $67.06, it’s trading below its one-year target estimate of $83.11. ANF has a dividend yield of 1.1%, smaller than that of some other retailers, but with a price-to-earnings-to-growth (PEG) ratio of only 1.28, the stock is more undervalued than many of its competitors’. The company also has a lot of cash and little debt, with a debt/equity ratio of only 3.66.
Gap — Gap’s stock has risen more than 7% since its 52-week low of $16.62 last August. At $17.68, it’s still below its one-year target of $19.77. GPS has one of the highest dividend yields in the group at 2.5% and boasts a PEG ratio of 1.46. With $2.47 billion in cash compared to just $1.25 billion in debt, that debt/equity of 33.04 is one of the best in the sector.
Lukewarm:
Nordstrom — The company’s reputation as a customer-focused retailer is well earned – and the company’s stock has delivered for investors. The stock has risen nearly 62% above its 52-week low of $28.44 last August. At $46.06, the stock is still under its one-year target estimate of $51.40. JWN has a dividend yield of 2% and a PEG ratio of 1.42, also lower than that of many competitors. But debt is a big issue – the company has nearly $2.8 billion in debt vs. $1.43 billion in cash (a debt/equity ratio of 130.37).
Macy’s — With its reputation as the ultimate department store, the Macy’s brand is a solid bet if you want to play the retail sector. The stock is trading up nearly 69% from its 52-week low of $16.93 last July. At $28.60, it is under its one-year target estimate of $35.12. M has a dividend yield of 1.4% and a PEG ratio on the high side at 2.56. Debt is also a concern: $7.08 billion vs. $1.15 billion in cash (a debt/equity ratio of 124.5).
As of this writing, Susan J. Aluise did not hold a position in any of the stocks mentioned here.
