We hear from a pretty wide swath of the retail department store space this week, with Wal-Mart, (WMT), Macy's (M), Kohl's (KSS) and Nordstrom (JWN) reporting as well as JC Penney (JCP). To have doubted the strength of the U.S. consumer at any point in the last 20 years - even during the 2008 Financial Crisis - was to have left a lot of money on the table in terms of portfolio performance.
There has been a wide swath of retail that has performed remarkably well despite the continuing encroachment of e-commerce, high gas prices, and lousy home values, etc. This morning, May 13th, April retail sales rose a stronger-than-expected +0.7% (excludes gas station sales per Brian Wesbury of First Trust Economics). According to Wesbury, retail sales are up 2.1% year-to-date and "core" retail sales are up 3.2% (Core being ex auto, gasoline and building materials) year-to-date.
Consumption is 2/3rd's of GDP, thus we could see 2nd quarter GDP start to be revised higher, particularly if gasoline continues to fall. This week, we hear from a number of department stores, some that we have owned and some not, but here is a quick look at the numbers, how last quarter looked, and how the sector is valued:
Reports Wednesday, May 15th after the bell.
The mid to higher-end retailer has engineered a remarkable turnaround since late 2008 when it traded under $10. Up 20% already year-to-date, analyst consensus is looking for $0.53 in earnings per share (EPS) on $6.4 billion in revenues for expected year-over-year growth of 23% and 4% respectively.
Comp's are expected in the 3.5% - 4% range. Forward revenue estimates over the next 3 years are looking for 3% - 5% revenue growth and 10% - 15% earnings growth, so the current 11(x) - 12(x) p.e ratio looks fairly attractive.
The other compelling valuation metric per our internal spreadsheet is the 10% current free-cash-flow yield, which means M has continued options to increase the dividend and share repo, should it want to do that. Macy's price to sales ratio is still just 0.56(X) too. Normally 1(x) P/S for a retailer is thought to be fair value.
Per one research note, the current consensus EPS estimate for M of $3.90 assumes a 3% - 4% comp for the fiscal 2014 (ends Jan '14). That would be a lower comp than how M has printed lately, so there could be an upward bias to estimates.
I like the price to cash-flow of 7(x) and the free-cash-flow yield of 10%. Don't like all the debt on the balance sheet since it constrains the dividend and share repo. Still, M has some flexibility to return capital to shareholders.
Our earnings model puts an intrinsic value on M of $46, while Morningstar puts a fair value on M at $43.
Another higher-end quality retailer reports Thursday, May 16th after the bell. Analyst consensus is looking for $0.76 in EPS on $2.81 billion in revenues for expected year-over-year growth of 9% and 7% respectively.
Quarterly comp's have been averaging 6% - 8% the last two years. Per the ThomsonReuter's consensus estimates, consensus around revenue and EPS growth expectations for 2014 - 2016 is 10% - 12% EPS growth on 8 - 10% revenue growth, which implies that JWN has less operating leverage at this point.
JWN is trading 0.93(x) price to sales, and at 10(x) cash-flow with a 5% free-cash-flow yield. Both EPS and revenue estimates have been stable since the February '13 earnings report.
Last quarter, a lower tax rate added $0.03 to the quarter for JWN , so earnings quality was thought to be low. Our earnings model values JWN in the low $60's while Morningstar's fair value rating is $58, which puts JWN at a slight discount to its approximate fair value. Unless Nordstrom's reports a blow-out number, on both comp's and EPS, we'd give it more time.
Reports Thursday morning, May 16th before the bell, with analyst consensus expecting $0.57 in EPS on $4.275 billion for expected year-over-year growth of -10% and 1% respectively. Kohl's is probably one of the better value plays in the department store group, but for a reason: since 2010, comp's have averaged between 0% - 2%, far below its peers. For Thursday's report, analysts think inventory might be too high and traffic too low.
Here is KSS's comp's the last 5 years:
- 2012: +0.3%
- 2011: +0.5%
- 2010: +4.4%
- 2009: -0.1%
- 2008: -6.9%
KSS has been a turnaround story for 3 years with little to nothing happening. A management change might be in order. Morningstar's intrinsic value on the stock is $61, so KSS is trading at 25% discount to Morningstar's perceived value, for good reason. We owned the stock for a while and then sold it.
We also haven't kept our model up to date, so I can't tell you where we think fair value is based on our valuation. It is tempting, but we are going to wait. KSS price to sales is 0.38(x) though is very cheap, although the free-cash-flow yield is just 3%. It looks like KSS's free-cash-flow is starting to dwindle.
The Street is looking for a loss of $0.86 versus a loss of $0.25 last year, on $2.6 billion in revenues, versus $3.1 billion in the year-ago quarter. Never owned it all through the pre, and post Ron Johnson periods. Technically JCP held its early 2009 low of $13.71 and has gotten a bid with the replacement of Ron Johnson.
Like KSS, and as we saw with Gap Stores (GPS), it took a full 11 years to turnaround Gap Stores, under several different merchandising teams. I have not run the cash-flow numbers on JCP so I don't know how it looks on that metric.
We are just watching it now, and will notice how it trades on what are sure to be bad numbers on Thursday. Comp's aren't as bad as originally thought which is a plus (JCP pre-announced the comp ahead of earnings), and the long-term financing is a huge positive to keep the doors open.
The retailer really needs traffic. JCP is a "show-me" stock right now.
The king of all retail with 10% of total US retail sales, WMT reports Thursday morning before the bell. Here is our preview as published on SeekingAlpha.
|Name of retailer||mkt cap (Bl's)|
In terms of ranking:
- Wal-Mart and Macy's or Macy's / Wal-Mart could be ranked #1 and #2 although WMT's market cap and dominance make it a safer long-term bet. Macy's is attractive on a cash-flow basis for sure.
- Nordstrom's is in the middle of the pack, simply on valuation and execution.
- Kohl's is a stock for a patient value investor, but it has been described as such for 3 years now. Patience is running thin. The cash-flow generation is critical.
- JC Penney is a real long-shot at this point, although the change in CEO's and the long-term financing, could be the catalyst needed. Too salty for me at this point.