GameStop (NYSE:GME) recently reported that it had held talks “with third parties regarding a potential transaction.” Of course, the disclosure led to speculation that the video game retailer was in negotiations about selling itself, sparking a rally in GameStop stock.
Whoever is interested in buying GameStop probably feels that its diversification efforts — including selling Apple Inc (NASDAQ:AAPL) and AT&T Inc (NYSE:T) products — will enable it to raise its 0.04% profit margin and thrive in the changing retail landscape. Other takeover targets in the retail sector must similarly be able to survive Amazon.com (NASDAQ:AMZN)
For example, Best Buy (as I predicted in 2015) has thrived by selling and providing expertise on exciting new consumer electronic products. The retailer has succeeded largely because Amazon is unable to offer the same face-to-face expertise.
So perhaps those interested in GameStop believe that it can win with a similar strategy. Alternatively, maybe the “third parties” with whom GameStop is talking are video game makers or video game console makers who want to use GameStop’s stores to promote their products.
The example of GameStop illustrates the two criteria that should be used when selecting retailer stocks that could become take takeover targets. First, it’s important to identify retailer stocks which have attributes that will enable them to compete effectively against Amazon. Secondly, retailers are likely to become takeover targets if they can be used by Amazon or other companies to significantly raise the sales of their products or become successful in a new niche.
Here are 3 retail stocks that I think could be takeover targets, whether for Amazon or for others looking to complete with the online-retail behemoth.
Retail Stocks that Could Be Takeover Targets: Best Buy (BBY)
As I previously noted, Best Buy (NYSE:BBY) has won by providing effective, face-to-face expertise about complicated, new, high tech products.
That advantage, along with Best Buy’s virtual monopoly in brick and mortar home electronic product retailing, has made Best Buy quite successful, lifting Best Buy stock tremendously in the process.
In light of Best Buy’s success, it’s clear that Amazon does not yet have overwhelming market share in the consumer electronics sector. Consequently, Amazon may very well be willing to buy Best Buy in order to improve its position in the space.
Consumer electronic manufacturers, such as Panasonic (OTCMKTS:PCRFY), Samsung, or even Apple, might also be willing to acquire Best Buy so that they could vigorously promote their products at the latter company’s stores. Finally, private equity firms would probably relish the opportunity of acquiring Best Buy in order to increase their profits through downsizing/restructuring initiatives.
Best Buy stock has a high market cap of around $21 billion, but a deal could probably get done with the help of a private equity firm.
Retail Stocks that Could Be Takeover Targets: Nordstrom (JWN)
Nordstrom (NYSE:JWN) is in the upscale apparel sector, which has proven somewhat resistant to the Amazon behemoth. That’s because many consumers still want to touch and feel expensive clothes before buying them.
Moreover, the retailer has created a highly successful online business, In fact, in the first quarter 29% of the company’s revenue was generated from online sales, versus 25% during the same period a year earlier. Additionally, Nordstrom’s Internet sales jumped 16% year-over-year in the first quarter, reaching “about $1 billion,” according to digitalcommerce360.
Many larger retailers, including Macy’s (NYSE:M) and Target (NYSE:TGT), would love the opportunity to sell products to Nordstrom’s online customers. Amazon could use Nordstrom’s website to jump start its own apparel business. For example, Amazon could e-mail coupons and ads to Nordstrom’s most loyal customers. The Internet giant could even place links to its apparel products on Nordstrom’s website.
Additionally, Nordstrom’s Q1 results were fairly impressive, compared with those of many other brick and mortar retailers. The company’s net sales jumped 5.8% year-over-year, while its earnings per share came in at 51 cents. And according to research firm Tigress Financial, Nordstrom is poised to expand its market share, driven by its “combined focus on service and ‘unique product offering,’ along with investment in new retail concepts,” The Fly reported recently. These attributes, along with the relatively affordable market cap of Nordstrom stock (about $8.6 billion) and the opportunity to cut costs/restructure, should make Nordstrom an attractive retail takeover target for private equity firms.
Retail Stocks that Could Be Takeover Targets: Sleep Number (SNBR)
Amazon’s mattress sales are growing quickly, as its mattress sales jumped 82% to $1.1 billion last year, according to One Click Retail. However, One Click Retail reported that Amazon primarily sells lower-end mattresses, Specifically, Zinus mattresses — which tend to be rather cheap — are by far the best selling mattresses on Amazon, One Click Retail reported.
Conversely, Sleep Number’s (NASDAQ:SNBR) mattresses are much more expensive and appear to cater to consumers looking for high tech mattresses. According to the company, its mattresses offer ” adjustable comfort and biometric sleep tracking. ” The mattresses utilize a “proprietary SleepIQ technology platform — one of the most comprehensive databases of biometric consumer sleep data”
By acquiring Sleep Number, Amazon could get a meaningful foothold in the high-end mattress space. And many consumers probably still like to touch, feel, and lie on expensive mattresses before buying them. Therefore, Sleep Number’s 550+ stores in the U.S. would allow Amazon to greatly increase its share of the U.S. mattress market.
Many other retailers who are struggling to compete against Amazon could want to enter the high-end market space, which seems to be holding its own against Amazon. Sleep Number’s business appears to be healthy and profitable, attributes which should be attractive to these retailers and to private equity firms.
In the first quarter, Sleep Number’s net sales fell 1% to $389 million, but it generated earnings per share of 52 cents. Moreover, the company had free cash flow of $40 million and reiterated its full-year EPS guidance of $1.70-$2. Assuming the company’s 2018 EPS comes in at $1.75, Sleep Number stock is currently trading at a reasonable price to earnings ratio of around 17.5. Meanwhile, Sleep Number stock has a very affordable market cap of just $1.14 billion.
As of this writing, Larry Ramer did not own shares of any of the companies mentioned.
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