Retailers: The Good, The Bad, The Indifferent - Barron's

by: SA Eli Hoffmann

Barron's takes a look at retailers, who are - as we know - getting killed this holiday season. Consumer spending will likely remain anemic well into 2009, sending more of the group to bankruptcy court to join peer Circuit City Stores (NYSE:CC).

Still, not all retailers are equally poorly dressed for the coming winter. Specifically, those with tightly knit balance sheets and warm relationships with financiers will likely weather the storm winds, and allow them to participate in the ensuing recovery. Hence:

Barron's recently examined the balance sheets of a host of publicly traded U.S. retailers. We divided the companies into four categories -- those in excellent, good, fair and poor financial condition, based in part on ratios of debt to Ebitda, or earnings before interest, taxes, depreciation and amortization, and interviews with credit analysts.

  • Companies in excellent condition: Abercrombie & Fitch (NYSE:ANF), (NASDAQ:AMZN), American Eagle Outfitters (NYSE:AEO), Bed Bath & Beyond (NASDAQ:BBBY), Coach (NYSE:COH), Costco (NASDAQ:COST), Family Dollar Stores (NYSE:FDO), Nike (NYSE:NKE), Wal-Mart (NYSE:WMT). Of them, COST looks pricey at 17x earnings, while NKE and COH are "especially attractive" given their lack of debt, moderate multiples, and strong outlooks. Of the teen retailers (AEO, ANF), one hedge fund manager prefers AEO because of its more reasonable price tags, a good fit for the nouveau frugal teen.
  • Good condition: Best Buy (NYSE:BBY), Gap (NYSE:GPS), J.C. Penney (NYSE:JCP), Kohl's (NYSE:KSS), Target (NYSE:TGT), TJX Companies (NYSE:TJX). JCP is cheaper than KSS. BBY should benefit from CC's bankruptcy filing, but not necessarily RSH.
  • Fair condition: Jones Apparel Group (NYSE:JNY), Limited Brands (LTD), Macy's (NYSE:M), Nordstrom (NYSE:JWN), RadioShack (NYSE:RSH), Saks (NYSE:SKS), Sears (NASDAQ:SHLD). Macy's debt, at 16%, might be a better bet than its stock. SHLD is in a precarious position, due to its upcoming debt maturities, failure to come up with a turnaround plan, and aggressive buybacks. Gimme Credit says it's most worried about SHLD, LIZ and JNS.
  • Poor condition: Bon-Ton Stores (NASDAQ:BONT), Charming Shoppes (NASDAQ:CHRS), Dillard's (NYSE:DDS), Liz Claiborne (LIZ), Talbots (NYSE:TLB). Don't bother bottom fishing - these stocks are heavily leveraged and will limp along, at best.