1 Retailer to Buy, 1 to Hold and 1 to Sell
In one of my earlier posts on hardliners, I gave a brief overview of three different industries through three different players. This post also aims to focus on another set of industries within this category so that we can have a broad look at the overall sector.
However, there is one interesting thing about this set of companies - two of them have lagged the market. This comes as a surprise given electrifying performance by the group for the year (with gains like +169% for Best Buy and +60% for Staples)
Is E-commerce really a threat for PetSmart?
PetSmart , as the name suggests, is a specialty retailer of pet services. The stock has been heavily punished by the market given the concerns that online competition might eat up the market share of this 'novel' company. However, it should be stated that bear thesis' on this stock lacks bite. Online competition seems to be a rather distant threat, and the tailwind from premium and natural foods will persist, giving the company edge over its competitors.
Traffic growth of roughly 1%, in line with recent trends--and still a standout relative to the broader retail sector--looks more likely going forward than the 2%-3% growth rate of the past two years. The company continues to pull many levers on the merchandising front to drive traffic. One of them is that PetSmart is resetting its entire dog hardgoods (hardgoods are pet supplies like leashes, collars and health supplies) selection-the first time in the company's history that the category has had an across-the-board revamp. Product adjacencies and displays will be reevaluated and optimized, and the company will introduce about 1,000 new items while culling roughly the same number of product laggards.
As far as the earnings are concerned, the company is expected to post EPS of $0.86 and revenue of $1.71 billion. The company is expected to announce its earnings on Aug 21. Let's see how the CEO addresses the so-called problem of online competition.
Is this an expensive stock to buy right now?
Many investors were disappointed when William-Sonoma's management gave a tepid raise in the guidance in the last quarter's earnings release. The market believed that this name is not a good investment anymore. However, they were wrong as the stock moved on to climb another 7% in the next quarter (vs. S&P moving only +0.7%). Many failed to understand that conservative guidance is a habit of William Sonoma's management team.
With help from the U.S. housing recovery, a mix shift of sales online, and further buybacks, earnings power seems higher than guided. However, the outlook also incorporates additional investments as international growth ramps.
Though, Williams-Sonoma is a great company with a unique brand portfolio, the shares trade at a multiple reflective of the business' potential (20x FY 13 EPS). The benefits from the company's U.S. housing exposure, the company's aggressive return of capital to shareholders, e-commerce and international opportunities, and future ROIC improvement appear to be captured at this valuation. There could be some upside if the company's competitive position improves - however, this seems far from materializing.
18% of the float shorted for this company
Well most would have already guessed, I'm referring to Sears Holding . The company has been one of the very few retailers who are going through tough times. Some years back, K-Mart bought Sears in an attempt to gain greater ubiquity and wider product choices. In hindsight, this merger appears as a patchwork mismatch of two separate companies that never produced the synergies to move them forward.
The company lacks any major initiatives that might help it progress. That said, the company has continuously been selling its assets in order to offset the cash that it has been bleeding since last year. The company recently (start of 2012) completed its spinoff of Orchard Supply Hardware Storessubsidiary. (It is interesting to note that Orchard Supply couldn't manage to survive longer and filed for bankruptcy and is ready to be taken over by Lowe's, a giant retailer of housing appliances.
This spinoff didn't stop Sears from selling off its core. The company recently agreed to sell two of its best locations to mall owner CBL & Associates. According to CBL's 10-K, one of the two stores sold by Sears was in CBL's most productive mall. These two stores may have accounted for up to $100 million of Sear's sales and over $4 million of EBITDA.
Overall, the company has got weak fundamentals and hence a weak outlook. It will require no less than a miracle to change this situation.
Williams-Sonoma seems to have a bright future. However, given current expensive valuations, it seems much of the good news has already been priced in the stock. Fears of online competition are overdone among PetSmart's investors and given its diversification into pet services (from pet supply), it is well poised to see some appreciation. Hence, I will recommend it as a buy. Sears has a high percentage of shorted shares and there is a reason for that - the company is eating up its valuable assets to survive. Such a situation makes a solid case for sell recommendation.
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The article 1 Retailer to Buy, 1 to Hold and 1 to Sell originally appeared on Fool.com.
Zain Abbas has no position in any stocks mentioned. The Motley Fool recommends PetSmart and Williams-Sonoma. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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