Cramer's Mad Money - 3 Retail Makeover Plays (5/17/11)

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Includes: AZO, DIN, DRI, EAT, ETH, GS, KSS, LULU, LZB, SKS, WBA, WYNN
by: Miriam Metzinger

Stocks discussed on the in-depth session of Jim Cramer's Mad Money TV Program, Tuesday May 17.

3 Retail Makeover Plays: Kohl's (NYSE:KSS), Walgreen (WAG), Autozone (NYSE:AZO). Other stocks mentioned: La-Z-Boy (NYSE:LZB), Lululemon (NASDAQ:LULU), Ethan Allen (NYSE:ETH), Saks (NYSE:SKS), Wynn Resorts (NASDAQ:WYNN)

Cramer discussed three companies which are transforming their businesses by remodeling their stores.

Kohl's (KSS) has elevated remodeling to a science. Nearly 100 of its 1,100 stores are having makeovers, and Kohl's has taken the average remodeling time down from 12 weeks to 7. When it has transformed the layout and appearance of its locations in the past, Kohl's has seen a 7% increase in sales at the stores. The company has increased its high-margin private label offerings, and has seen a 40% rise in e-commerce. Kohl's has terrific cash flow and is buying back $1.8 billion worth of stock. It plans to institute a dividend in June. With a multiple of 12 and a growth rate of 13%, Kohl's is cheap.

Walgreen (WAG) is remodeling its stores and lowering operating costs. Not only is it making over the appearance of its locations, but is changing management structure of its stores. The company has already remodeled 1,500 stores and expects to refresh an additional 3,500. Walgreen has seen a 5.5% increase in sales and the stock is up 30% from where Cramer got behind it in October 2010.

Autozone (AZO), the leader in auto parts, converted 60 of its 140 stores in 2009 and is continuing to revamp its locations. The company is seeing a 21% growth in commercial business. Cramer would wait until AZO reports on May 24th before buying the stock, which is up 53% since last year.

Cramer took some calls:

La-Z-Boy (LZB) is alright, but Cramer prefers Ethan Allen (ETH) whose showrooms are flooded.

Wynn Resorts (WYNN) is a winner on its big numbers in Macau.

Saks (SKS) is not the kind of stock that works well on options because it is a "slow creeper." Cramer would stick with the common stock. He likes the company's earnings, but added it seems stuck.

Lululemon (LULU), like other high multiple stocks, is under pressure. Tuesday is the first day Cramer has seen a real turnaround, and he would buy LULU with deep in the money calls going out 3 months. The common stock is too risky right now.

Darden (NYSE:DRI), Brinker (NYSE:EAT), DineEquity (NYSE:DIN)

In spite of the fact that stocks are being sold off, they should be higher, given lower commodity costs and falling oil prices. Around 85% of stocks should go higher or at least stay steady on lower prices at the pump. Cramer thinks oil prices may fall to as low as $85-90, and restaurant stocks will be a main beneficiary. He dedicated a segment to discussing restaurants that have already seen substantial growth, mature companies that are more stable investments than regional to national stories. With more mature restaurants, growth rates don't matter as much as same store sales and the companies' ability to refresh their brands.

Darden (DRI) is the master of rebranding. Red Lobster was in terrible shape in 2009 with same store sales down 14%. The company remodeled its Red Lobster restaurants with a seaside dining theme, and the chain is now back in positive territory. Darden also revamped Olive Garden with a Tuscan farmhouse theme and is in the process of transforming Longhorn Steakhouse into an elegant ranch house dining experience. Even when commodity prices were high, Darden showed excellent discipline in keeping costs down and reported three consecutive quarters of margin improvement. The company has a clean balance sheet, a buyback in place and offers a dividend of 2.6%. Darden is Cramer's top restaurant pick of the day.

DineEquity (DIN) is turning around Applebees with a massive remodeling project, and the chain is seeing same store sales rise by 3%. IHOP is lagging behind with same store sales down 2.7%. DineEquity does not have the same exposure to commodity costs because of its franchise business model, but might see less upside on lower commodity prices than Darden.

Brinker (EAT) is only just beginning its rebranding efforts with Chili's and offers a dividend of 2.2%.

Goldman Sachs (NYSE:GS)

Investors ask Cramer about banks, which have been "professional pinatas" of late. They look cheap, but might well get cheaper. Technical analyst John Roche think the banks are value traps. True value stocks have some momentum, but the bank stocks are stalled or declining. The chart of Goldman Sachs (GS) shows that the stock has managed to stay above its support of $130 but broke through its 40 week moving average. There might only be ten points of downside, but if Goldman Sachs falls past $130, it may go as low as $110. GS is down 16% year over year and the S&P has risen 5%. There is no point looking to European banks for investment ideas, since their charts are even worse. Cramer doesn't see the fundamentals improving for the banks, especially since the government is cracking down on the banking sector.

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