Retail hasn't had the best year in 2013, especially the apparel segment. But, the industry is relatively cheap and I believe there are segments where you can find good returns. I continue to believe that playing on the high end or the low end (not the middle) is a good strategy, and that growth companies should continue to see momentum. On the value side, we see tons of debt-free apparel companies trading at 5-6x EBITDA. I don't know if there will be acquisitions, but the industry is set up from a valuation perspective for some. Let's get to our list…
I'm a big fan of the sporting good segment going into the New Year. We have had a cold winter to date, which helps boost sales of coldwear and jackets. Most of the sporting good names had a weak winter last year and I expect that to revert. Additionally, 2014 will see a Winter Olympics and a World Cup, each of which should help the entire industry. I am a fan of Dick's Sporting Goods (DKS) and Big 5 Sporting Goods (BGFV) for 2014. Dick's will benefit from its store-inside-a-store concepts with The North Face, Nike (NKE), and Under Armour (UA). Other catalysts for DKS include:
- The new Field and Stream concept that has been performing well to date
- I expect the company to beat 2014 guidance estimates
- Increased guidance on store expansion makes the original 900 store goal more feasible
- The company is testing smaller store concepts, which has been something investors have been hoping for
- The company has a plan in place to reach double-digit margins
- DKS is growing their e-commence and omni-channel platform, while increasing margins in the business at the same time
- The company is investing in more employees, which investors have been hoping for
For BGFV, has seen a rebound in their business, which was hurt hard during the recession because of the regions the company serves, specifically California. Margins bottomed for the company in the low 4% range, but have started to turn around, and should return back to the company's historic 6-8% range. This margin expansion creates a minimum 40% upside in the stock going forward. Margin expansion is further supported by a new store concept, favorable lease negotiations, and higher-end (higher-margin) products. BGFV will also enter the e-commerce area in 2014. Even with these positives, the company trades at a discount to the rest of the industry.
Additionally, I am a fan of Cabela's (CAB) for its growth plus value combination. On the growth side, 2014 will be a year in which the company starts an aggressive store growth campaign that will double the total current square footage of the company's retail business by 2017. That's only the beginning; considering the company currently has only 50 stores, and sees the opportunity for up to 225 stores between the US and Canada, there is at least 10 years on runway left on this expansion. These large stores (can be up to 100K square feet) provide the experience quality necessary to be successful in the changing landscape of brick and mortar retail.
On the value side, we can think of CAB as a retail business and a credit cards business. The sum-of-the parts of these two businesses are significantly higher than the company's current value. Investors sometimes overlook the credit card business, but it is actually a very attractive asset. The company's card is one of the top 15 most used cards in the US, and has an average FICO score of about 800. These characteristics make the card very attractive to some of the major credit card companies for an acquisition. Though I do not believe the company will sell the card in the near future since the CFO comes from the credit card business, investors have brought up the idea of a credit card spin-off and this action could occur in the future.
To warn investors, there is some risk to the CAB story in the first-half of the year. The company will be coming up against some very tough comps off of last year's boom in the firearms business. I don't expect firearms to fair as well this year, and we could see a sell-off occur because of this, but I would be using any weakness as a buying opportunity. In the back-half of the year, the story will become too good to ignore, and I expect the stock to reach the $75 price level by the end of 2014.
As I noted in my recent article, Top 12 Ideas for Your Portfolio in 2014, I think the first half of 2014 is shaping up to be good for the homebuilders. Interest rates beginning to rise combined with a better overall economy creates the environment for a strong spring selling season in 2014. The biggest beneficiary of this trend is the furniture companies.
Multiple analysts have recently spoken about how new home buyers make the majority of their large purchases (i.e. furniture) during the first 18 months after buying a new home. This intuitively makes sense considering people need furniture in their homes once they live there. This fact also makes the furniture industry heavily dependent on new home sales. The US has recently seen a stabilization/pickup in new home sales, which should be a catalyst for the furniture industry for at least the next 18 months.
Source: US Census Bureau
Furthermore, a strong spring selling season would be catalyst for the furniture companies for the entire coming year. I think the best way to play this trend is through Bassett Furniture (BSET) and La-Z-Boy (LZB). I also think Pier 1 Imports (PIR) has upside in the coming year.
Though it might not compete in the most ideal areas, Macy's is a clear winner in the retail space. The company was a pioneer in the omni-channel space, and that first mover position has done the company a great deal of benefit. Macy's competes in the higher-end segment of mall retail, which benefits the company in this environment. Macy's is also known to have the best buyers, which take a region-by-region approach to their assortment. E-commerce fulfillment through excess inventory in the store base also helps keep inventory levels clean. Even with its leadership position, the stock trades at 12x earnings and 10x free cash flow. I believe it's a top name for any portfolio.
Whole Foods Markets (WFM)
I think the sell-off is overdone, and even though I think some of the other healthy grocers could struggles, WFM will be the long-term winner in the space. The company has a long-term plan in place to at least triple its store base and at the same time will achieve mid-single digit comps over the next few years. The company gave good reasons why the comps were weak last quarter:
- Strategic Price Matching - in the past, the company has pointed out that they still have to compete on price. The company is matching price on specific items and hoping to make it back on other items in the basket.
- Cannibalization - the company noted that in areas where several stores opened this year, like Boston, the company saw some cannibalization. But, the company also noted that in the past they have seen this cannibalization upfront, followed by comp increase at both the new and older stores later on. This could be taken as a negative, but I'm willing to trust WFM management on this and expect market share gains in these areas.
- Competition - this is the one that the company will have to manage. It's becoming a more competitive environment, but I believe that WFM's differentiated approach will help the company win.
- Marco environment - the company sees a slowdown in the macro, which makes sense, and like most other companies, is not immune.
This story played out before in early 2013, and the company was correct in its assumptions that comps would rebound. I see the stores that have been cannibalized this year rebounding in 2014. I have a $75 price target on the stock. Just to note, another name I continue to like in the high-growth food and beverage space is Starbucks (SBUX).
American Eagle (AEO) and My Thoughts on Apparel
As I noted in my recent article, The Top Tax-Loss Selling Candidates For 2014, it's been a very tough year for the teen apparel space. I'm not a big fan of apparel retail going into the New Year, or the teen space, but I see American Eagle as the name that will come out of this period in the best position. The company also offers a 3.5% dividend yield at its current levels which helps provide support. This is more a back-half of 2014 story.
I would have recommended Abercrombie & Fitch (ANF) in this space because of its greater operational leverage and cost-cutting initiates in the business, but I can't recommend it after the company extended CEO Mike Jefferies contract. If Jefferies were to leave, I would immediately think this stock is a buy with at least 30-40% upside, but I don't see that happening. This really makes you question what the board at is doing.
The first half of the year is setting up to be weak for the retail space, but there are segments that should outperform. I do believe that the back half of the year will be more bullish for the industry, and will probably come out with an updated list for the back half of the year during 2014.