Picking a winner among retail stocks

As a group, most are struggling. But one in particular has good prospects and plenty of upside from its current price.

By Jonathan Berr Aug 19, 2013 9:30AM
Ahead of the critical back-to-school season, it's investors in retail stocks who have gotten an education.

 

Companies ranging from Wal-Mart (WMT) to Macy’s (M) to Kohl’s (KSS) have all reported disappointing results over the last week or so, and their stocks have faltered. Consumers, it seems, are keeping a tight grip on their wallets as they head into the second-most-critical period for retailers behind the December holidays.

Their unease is reflected in unexpected drop in consumer confidence for August as measured by the Thomson Reuters/University of Michigan preliminary index released on Friday.

 

However, the sell-offs in some of these stocks are overdone and present a buying opportunity. But which ones?

 

When choosing the right retail stocks, it's important to remember a few things. First, investors should separate Wal-Mart from the rest of the pack. The world's largest retailer is facing several unique problems, such as not having enough staff to keep the shelves stocked. Although its rivals are experiencing the same macroeconomic issues, they seem to be faring better than the Arkansas-based company.


Young woman clothes shopping (© Image Source/Getty Images)For instance, the discount giant reported a 0.3% drop in U.S. same-store sales (sales in stores open for at least a year) in the most recent quarter. Analysts had expected a 0.9% increase. Kohl's, which also reported earnings on Thursday, had a 0.9% jump in that critical metric. And while Macy's same-store sales fell 0.8% in the most recent quarter, it expects to generate gains of 2% to 2.9% this year.  

 

Wal-Mart shares are also kind of expensive, trading at a multiple of 14.52, a five-year high. Macy’s or Kohl's may be better alternatives along with retailers that cater to the wealthy, such as Tiffany (TIF), which have seen a surge in business.

 

Macy’s and Kohl's are indeed cheaper than Wal-Mart, trading at price-earnings ratios of 13.4 and 12.5, respectively. Analysts have an average price target on Macy's of $53.22, about 18% higher than where it recently traded. Kohl's is trading near its 52-week target of $52.35, but that price may prove overly conservative if economy doesn't falter significantly. 

 

Tiffany, whose name has been synonymous with luxury for generations, is worth considering also. At least three analysts have $90 estimates on the stock, about 13% higher than where it recently traded. Plus, its latest earnings exceeded Wall Street estimates.

 

Of the stocks discussed here, the best buy now is Macy's, given its immediate upside potential. Investors can hold off on the rest until their prices come down some.


Jonathan Berr does not own shares of the listed stocks. Follow him on Twitter @jdberr.

8Comments
Aug 19, 2013 9:38AM
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the classic marketing question "who's your customer?" comes into play. 

 

walmart, khols, lean toward the average person.  who are sliding in the payscale as we speak.  so they have cut back buying big time. 

 

people are adjusting just how they buy things.  used, thrift stores, yard sales, trading with friends.  and recognizing they already have "enough" stuff. 

Aug 19, 2013 10:19AM
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Globalization and its intended consequences will define how much the consumer will have to spend and all indications are it will be much much less.  I think most can see at this point poor folks will be much poorer and rich folks will be much richer.  At some point many American consumers will be unable to maintain present habits.  Free trade has brought a new income curve for retailers to ponder.  The question is quickly becoming how to sell less for less. I believe most retailers will run out of the present advantage of cheap overseas crap and then things will become much more interesting at the retail level.  With many jobs paying merely $3 per hour in the near future profits that are currently being made off the arbitrage will disappear.  Retailers will have already eaten the cake.
Aug 19, 2013 10:40AM
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Most of the retailers we see today are destined to fail in the future. When I was a kid there was no Wal mart, Target, Kohls... There was Disco, Unimart, Zodys, Fedmart, Fedco, Wards, WT Grant, May Company, Robinsons, Mervyns, Gottschalks, Troutmans and many others.

All of these large stores, many of them exactly like walmart, failed, gone forever. There were no bailouts for these guys. The dow kicks out any company with zero stock value like these stores and others, or even companies that aren't doing well to keep their phony rigged dow number always going up.

Aug 19, 2013 10:59AM
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"All of these large stores, many of them exactly like walmart, failed, gone forever. The dow kicks out any company with zero stock value like these stores and others, or even ones that aren't doing well to keep their phony rigged dow number always going up."

 

Which should tell you precisely what is in store for today's retailers including Tiffany's. You have to be kidding... we are at the artificial pinnacle of materialism without a net. You tell me... will they be lining up outside Tiffany's the day after QE ends? Wal-Mart's flaw is basic education. People with little cash are learning you don't waste it on buying the same item repeatedly because it's too cheap to last long.

Aug 19, 2013 10:52AM
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Looked hard at Kohls, and Walmart just seemed pricey....Never looked at the others..

 

Decided on Target (TGT) and Walgreens (WAG), wag for about the 3rd. or 4th. time.

YTD upside Tgt...15+%

..................Wag...32+%

Conagra....Cag....18+%.....CAG was the food play for consumers.

 

None of these are from inceptions(original buys) gains, which are somewhat better.

Although other retail may possibly have had more, you have to be happy or live with your picks.

Tobacco is another consumable, and that has had a terrific run..Sin as it may be, but a great upside.

Walgreens has been a steadfast performer, and a different retailer of sorts...

And was an enormous help in getting us through early part of Recession. 

 

Aug 19, 2013 1:35PM
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Not having enough stock? Would that be considered a crack in the "Supply sided Economic" flop?
Aug 19, 2013 2:16PM
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Everyone knows that retailers who depend on cheaper minded folks will struggle. Shareholders demand more, more , more. Prices have to go up, up, up and quality... down, down, down. It only makes sense to invest in retailers that cater to the top 15% or so.
Aug 19, 2013 2:26PM
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There's more than one retailer on the upswing . RH comes to mind!!
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