Readers of this space know that, given the uncertainties regarding U.S. economic growth, household formation, and job creation, the retail sector is to be avoided. Still, there are exceptions -- particularly when the fundamentals suggest it's a decent time to get-ahead-of-the-pack with a company -- and with the aforementioned in mind, Staples is worth a review.
In general, analysts don't forecast anything spectacular about Staples, Inc. (Nasdaq: SPLS) FY 2009 North American retail sales, which should decline 1-3%
Still, there are bright spots that provide cause for hope: strong results from the North American delivery division's Chicago, Denver and Miami regions point to untapped domestic metropolitan area opportunities.
Further, margins should widen as SPLS's ramping private-label business comprises a larger percentage of sales.
With the U.S. economy growing at an anemic rate (if it isn't already in a recession), investors should, in general, avoid the retail sector.
Still, there are those isolated companies, which, via either niche or operational execution, qualify as an exception, and with the above in mind Target is worth a review.
Target Corporation (NYSE: TGT) should post adequate FY 2009 same store sales growth, aided by refinements to its electronics, apparel, and home furnishings offerings, with a continued focus on value.
What's a tell-tale sign of a recession, and conversely, an indicator investors/readers should monitor to spot when the recovery has started? Retail sales -- particularly at department stores.
Most retailers will report March 2008 same-store sales this week, and Wall Street is bracing for the worst. In January 2008 and February 2008, same-store sales declined at nearly every major department store, including JC Penney (NYSE: JCP), Macy's (NYSE: M), Kohl's (NYSE: KSS), Dillard's (NYSE: DDS) and Nordstrom (NYSE: JWN).
Further, investors should watch Nordstrom's same-store sales carefully. The reason? Upscale retailer Nordstrom is a type of quick-reference, or an economic-barometer-in-a-snapshot, of the depth of a recession. If retail sales decline at broader-demographic retailers for several consecutive months, that points to a recession. But if sales decline at upscale retailer Nordstrom, that's a sign that even those with higher incomes and substantial assets are cutting back, which is a bad sign for the economy.
Nordtstrom's customers include professionals, executives and business owners -- including people who make hiring decisions. If they're cutting back, that may indicate they will not be hiring in the period ahead, which is never good news for the economy. Invariably, it means the recession's end is not near.
In Q4 2007, Nordstrom's sales fell 4.4% and earnings per share fell for the first time in more than five years to 92 cents per share. If Nordstrom's same-store sales decline again in March, that's a sign of continued belt-tightening by upper-middle and upper-income adults, and a sign that an economic recovery is not near.
Market pullbacks and periods of protracted economic sluggishness are not the most calming circumstances, but they do create buying opportunities, and with the above in mind, Yum! Brands is worth an evaluation.
Yum! Brands (NYSE: YUM) operates the world's largest fast food operation network, including signature chains Kentucky Fried Chicken, Pizza Hut, Taco Bell, and Long John Silver's.
Analysts like YUM restaurant opening timetable, with 1,000 net new restaurants expected to open annually, with impressive international restaurant growth. Operating costs are reasonable, and margins are solid.
Further, China operations may see a 20-30% earnings growth in 2008. Overall 2008 earnings are likely to grow 10-12%. Moreover, in what may become a new chain concept or a variation of an existing format, YUM is experimenting with grilled chicken at its KFC restaurants. The Reuters F2008/F2009 EPS consensus estimates for YUM are $1.87/$2.11.
The risks? Analysts are keeping an eye on YUM's food ingredient costs, and marketing expenses.
The First Call mean rating for YUM is: Hold. [14 firms.] Mean 2008 target: $40.00. [high: $43, low: $37.]
Stock Analysis: Yum! Brands is a moderate-risk stock not suitable for low-risk investors. Investors with an investment horizon longer than two years should be rewarded from YUM's shares. Sell / Stop Loss if you were to purchase shares in this company: $27.
Disclosure: Lazzaro has no positions in stocks. In addition to private real estate holdings, he owns corporate and municipal bonds, and cash certificates of deposit.
Readers of this space know that one argument forwarded here is to avoid retail stocks during sluggish economic times, but there are exceptions, and American Eagle Outfitters is one.
American Eagle Outfitters (NYSE: AEO) is one of the largest specialty retailers, targeting teen/young adults, and offering all-American casual apparel, accessories and footwear.
Analysts like the fact that American Eagle has re-focused on its "bread and butter" market: the 15-25 year-old group, and eliminated sideline-demographic categories. The above should drive impressive 12-15% FY 2009 sales growth, accelerating from 10-12% sales growth in FY 2008.
Analysts also like AEO's improved merchandise flows, and regional assortments: look for sales to really impress in AEO's sunbelt stores in the quarters ahead. The Reuters FY 2008/FY 2009 EPS consensus estimates for AEO are $1.81 to $1.98.
The choppy/consolidating (or perhaps worse) market conditions sometimes give the impression that growth plays do not exist, but that is not the case, and one growth company worth evaluating is Urban Outfitters.
Urban Outfitters, Inc. (Nasdaq: URBN) operates more than 120 specialty retail stores under the Urban Outfitters, Anthropologie, and Free People brands, and also offers clothes via a wholesale division under the Free People label.
Analysts like the fact that URBN carries in-demand, self-expressive merchandise, with differentiated retail brands. Most analysts believe the company has achieved a retail gold star: a unique brand position in the ages 18-24 customer category. Moreover, a relatively high 50/50 private label/nation brand inventory lowers inventory risk.
Sales increased an impressive 23% in FY 2008, with analysts seeing a 20-25% rise in FY 2009. Operating costs are reasonable. The Reuters FY 2008/FY 2009 EPS consensus estimates for URBN are $0.90 to $1.15.
Sears Holdings' shares plunged $6.90 to $89.39 Monday at mid-day after the company announced that same store sales for the holiday period fell 3.5% and that Q4 earnings could be about 50% of last year's Q4 profit.
Sears said for the 9-week period ended January 5, same store sales fell 2.8% at Sears stores and 4.2% at Kmart stores. The company cited increased competition, the housing sector's slowdown, and consumer credit concerns as reasons for the sales shortfall. Another SHLD disappointment
Analyst C. Leonard Bauer told BloggingStocks on Monday that Sears' announcement will not do much to increase Wall Street's low confidence in the company's prospect, at least short-term.
Meanwhile, Q1 same-store sales increased 5.4%, Walgreen said, including a 4.6% "front store" revenue gain and a 5.9% "back store" gain, which includes pharmacy revenue.
The market is set for a lower open this morning, and one of the stocks that will be contributing to the slow start will be warehouse retailer Costco Wholesale Corp. (NASDAQ: COST) which is currently trading down slightly over 6% in today's pre-market action.
The company announced its fiscal Q1 earnings this morning and was unable to beat analyst estimates, despite an 11% increase in quarterly profit. For the entire quarter the company showed earnings per share of 59 cents, which was in-line with what analysts had been expecting to see going into today's report.
Despite not being able to outpace analyst estimates for earnings, the company had a pretty good quarter overall. If you take a look at revenues, you see a very respectable jump of 12% in the quarter, which is a great increase, but once again, in-line with analyst estimates.
In today's market, the retail space is fraught with risk. High energy prices have crimped consumers' disposable income, and the housing slump has dented household formation -- a backbone of retail sales growth. Meanwhile, sluggish job growth is sending a signal that a U.S. economic slowdown is underway.
Hence, if one is to consider a retail play, it should be a well-capitalized company, with a demonstrated business model, and Costco (NASDAQ: COST) fits that bill.
Costco helped define the 'get it for wholesale' space and now operates 520 warehouses, primarily in the United States and Canada. (The company operates 30 stores in Mexico via a joint venture.)
Costco's philosophy differs from its competitors in that it focuses on a limited selection of national-brand merchandise and some private-label products. That laser focus, combined with buying direct from manufacturers and the company's bare-bones warehouses, enables the company to operate profitably despite smaller gross margins. The Reuters F2008/F2009 EPS consensus estimates for COST are are $2.98/$3.39.
Corporate profits have slowed in Q3, and U.S. economic growth most likely slowed in Q4 as well, but analysts say talk of a recession may be slightly premature.
Corporate profits fell to an annual rate of $19.3 billion in Q3 as domestic earnings dropped by $41.2 billion, according to U.S. Commerce Department data. The U.S. economy is being hurt by sluggish retail sales and write-downs in the subprime mortgage sector; the two have been offset by strong earnings abroad, but the domestic side may outdo the international side in Q4.
"The earnings recession has already arrived,'' said David Rosenberg, North America economist for Merrill Lynch (NYSE: MER) in New York told Bloomberg News. "We are going to see an economic recession in '08.''
The Institute of Supply Management's manufacturing index for November 2007 totaled 50.8, above the consensus estimate, but slower than October 2007's reading of 50.9. Any reading above 50 indicates economic expansion.
Wall Street's luke-warm stance toward the retail sector should not prevent you from considering Kohl's Corporation (NYSE: KSS) as a retail play.
Kohl's has successfully broadened its offerings to the point where it is now a leading, moderately-priced retail chain. Kohl's offerings in apparel, shoes, accessories, cosmetics, home furnishings and housewares now hold their own against primary competitor JC Penney Company, Inc. (NYSE: JCP).
Further, regional market adaptations of store inventory keep KSS in-tune with what consumers want in a particular geographic area. Also, a computerized mark-down optimization program is likely to improve margins for clearance items/lines: there's no sense cutting the price of an item before a store has to, in order to sell it. Not surprisingly, analysts' channel checks consistently report a department store chain that knows what its customers want, and that prices items fairly, in well-run stores.
Also, look for Kohl's to slightly expand its customer base, but its target market of married women ages 25-50 should continue to drive impressive same store sales gains. Kohl's has about 820 stores and expects to have 1,200 by F2011. The Reuters F2008/F2009 EPS consensus estimates for KSS are: $3.64 to $4.22.
The qualifiers? As always, analysts are watching the consumer discretionary spending statistic in light of continued elevated gasoline prices, and a possible slowing U.S. economy. Hence, if gasoline sails past $4 per gallon in 2008, it undoubtedly hurts Kohl's results. But absent that scenario, look for Kohl's to remain a leader in its segment. KSS's modest p/e of 13 also lowers the stock's risk/return ratio.
The First Call mean rating for KSS is: Buy. [25 firms.] Mean 2007 target: $71.00. [high: $103, low: $47.] Stock Analysis: Kohl's is a moderate-risk stock not suitable for low-risk investors. Don't buy Kohl's shares if your portfolio already contains an adequate retail component. Investors with an investment horizon longer than 2 years should be rewarded from KSS's shares. Sell / Stop Loss if you were to consider buying this stock: $37.
Given concerns about a possible slowdown in U.S. consumer spending in the quarters ahead, U.S. retailers haven't received much respect lately on Wall Street. But Target Corporation (NYSE: TGT) is one that should.
Target should post healthy 2007 same store sales growth on improving margins, aided by refinements to its electronics, apparel and home furnishings offerings, with a continued focus on value.
Further, Target's new store opening timetable remains on-schedule, with the company planning to open 100 new stores in F2008, including 30 SuperTarget stores; each should help overall revenue, although investors should keep in mind that these stores are not counted in same store sales revenue statistics. Target's shares closed Friday up 83 cents to $53.93.
In addition, Target's marketing campaign seems to be registering better with upper-middle-income shoppers, who appear to be increasingly seeking better values. The Reuters F2008/F2009 EPS consensus estimates for TGT are $3.56 to $4.06.
Wal-Mart (NYSE: WMT) is reducing the amount of capital expenditures for 2007 in light of reduced expansion of the company's Supercenters in the domestic market as it attempts to eke out more sales from existing stores.
Well, as I've stated for over a year here at BloggingStocks, this is a strategy that the retailer was forced to take. It's already saturated many U.S. markets, and opening stores for the sake of opening them just won't cut it for growth any longer. The problem is that I still don't see the changes that will make sales growth happen in existing stores. Doug McIntyre even wrote about the retailer closing some stores about a year ago. What's in store for the retailer is anyone's guess at this point.
As a result, the world's largest retailer will cut its capex amount down in the range of $14.7 billion to $15.4 billion, down from a figure of $17 billion earlier in the year. Wal-Mart's chief administrative officer, John Menzer, stated that the retailer still has a goal to "beat" the $15.5 billion figure, however. With Wal-Mart's recent unwavering plan to continue opening stores in the face of declining same-store sales at existing locations, this admission was a bit overdue, to put it mildly.
The retailer also reiterated capex plans for fiscal years 2009 and 2010, saying it would spend $13.5 billion to $15.2 billion each year. Along with that, the retailer expects square footage growth (new stores, in other words) to come in at 6% for the current fiscal year, with a 5% to 6% figure for the 2009 and 2010 fiscal years as well.
What's a tell-tale sign of a recession, and conversely, an indicator investors/readers should monitor to spot when the recovery has started? Retail sales -- particularly at department stores. 
Sears Holdings' shares plunged $6.90 to $89.39 Monday at mid-day after 
Walgreen Friday posted first quarter EPS of 46 cents, 
The market is set for a lower open this morning, and one of the stocks that will be contributing to the slow start will be warehouse retailer 
In today's market, the retail space is fraught with risk. High energy prices have crimped consumers' disposable income, and the housing slump has dented household formation -- a backbone of retail sales growth. Meanwhile, sluggish job growth is sending a signal that a U.S. economic slowdown is underway. 
Just how high will U.S. gasoline prices rise?
Nordstrom and Kohl's post smaller-than-expected Q1 profit declines
Oil hits record $127.43 on supply concerns, raised Goldman forecast
