It's Thanksgiving week, which marks the beginning of the holiday shopping season. Retailers seem to be ratcheting up the competition even more than usual this year, as sluggish economic growth has led consumers to be fairly stingy. Many retailers are opening earlier than ever on Black Friday to try to bring more customers in. Stores that don't keep up may find that deal-hunting consumers have exhausted their holiday budgets before those stores have even opened on Black Friday.
For all of these picks, I would note first that this could be a rough week for the market, as the deficit super committee is supposed to report to Congress and seems to be deadlocked. When the deficit/national debt issue last surfaced (in August) the market tanked, even after an 11th hour deal to raise the debt ceiling emerged. If the super-committee fails, it could send a signal that Congress is unable to tackle the country's fiscal problems, possibly leading to further credit downgrades. So I would not recommend buying until later in the week or early next week, after things have shaken out somewhat.
With that said, here are my picks in the space, from worst to best:
Sears Holdings (NASDAQ:SHLD), owner of the Sears and Kmart chains, is a complete basket case these days. The company is unlikely to turn a profit this year or next. On the one hand, the company trades at a very low price to sales ratio, indicating that Sears has potential if it can regain profitability. Yet the company shows no evident signs of progress. It's currently resorting to gimmicks like selling its exclusive products in other stores and allowing vendors to open up stores inside of its own stores.
Both of these moves risk eroding the few competitive advantages Sears retains. The company seems to be headed towards breakup, but I do not expect such a process to unlock enough value to justify the current share price. Kmart stores will be open on Thanksgiving Day, but unfortunately for the company, hardly anybody wants to shop at Kmart these days. Meanwhile, Sears stores will be opening at 4 a.m. This risks missing out on customers who go out bargain-hunting at the stores opening at midnight or earlier. Sell!
J.C. Penney (NYSE:JCP) is not much better. I wrote earlier that J.C. Penney was a disaster waiting to happen, a prediction which was more or less confirmed by a poor Q3 earnings report. The company has a great new management team, but it will not be easy to turn J.C. Penney around. J.C. Penney's sales and earnings have fallen this year, and trends are pointing toward a weak fourth quarter. The company is sticking to its guns and opening stores at 4 A.M. on Black Friday even though its closest competitors (Kohl's and Macy's) are opening at midnight. While good for employees, I doubt this move will pay off for shareholders. I expect J.C. Penney to disappoint on sales and profit again in Q4. Sell!
Wal-Mart Stores (NYSE:WMT) is a company that has been in a funk for years. I think that the company is finally getting its feet back under it, but I doubt that Wal-Mart will be able to reignite significant profit growth in the future. On the bright side, Wal-Mart has reintroduced its layaway program, which seems attractive to customers. This will help sales and profits for the fourth quarter. However, weak consumer sentiment means that Wal-Mart's core customer will be thrifty again this year.
The company is trying to get a leg up on the competition by opening at 10 p.m. on Thanksgiving evening. By being the first destination of the holiday season for many shoppers, Wal-Mart is hoping to gain a bigger share of their holiday budgets, and I think the tactic will be relatively successful. However, there's still a lot of work to be done here. The best case for Wal-Mart is that as the U.S. economy improves, its core customers will have bigger discretionary budgets leading to better sales and margins. It will take a while for this scenario to play out, though. Hold!
J.W. Nordstrom (NYSE:JWN) has had an off-and-on year. The company has regularly delivered profit roughly in-line with analyst estimates. They have shown very strong sales growth this year as well, but profits have not grown nearly as quickly as at competitors like Macy's (NYSE:M). Nordstrom's is benefiting from a resurgence in the luxury segment. However, even higher end stores like Saks (NYSE:SKS) and Neiman Marcus may be taking some share from Nordstrom.
Nordstrom is also being squeezed from the low end by Macy's, which is becoming more attractive to wealthy shoppers. Nordstrom's is a solid company, but is not showing enough profit growth at this point to justify buying in. If share prices fall back to August levels around $38, then this would be a very attractive stock candidate. Hold!
Target (NYSE:TGT) has been fairly successful over the past couple of years at driving store traffic through an expanded grocery section. While food is a lower-margin business, it is an effective means of bringing customers back to the store, where they may make impulse purchases. Nevertheless, the weak economy has impacted Target, and slowed growth considerably. This year, the company is opening stores at midnight on Black Friday, which has catalyzed some employee backlash. Ultimately, it was the right decision, though, since most of the company's rivals will be opening then or earlier.
Target shares are very cheap compared to historical levels at a P/E around 12. Furthermore, the company will make a big push into the Canadian market in 2013, which will provide a major growth opportunity. Target is a great brand and -- unlike Wal-Mart -- is not even close to saturating its market opportunity. There is plenty of upside for this company in the next few years. Buy!
Kohl's (NYSE:KSS) is a well run company and has been weathering the downturn fairly well. Department stores in the low-mid price range have hit hard times lately, as discounters and high-end retailers have taken an increasing percentage of consumer spending. Despite a few bad sales months, Kohl's has managed to grow sales and profits at a modest rate this year. The company is taking market share from Sears and J.C. Penney, two struggling peers. Unlike those two chains, Kohl's will be opening at midnight on Black Friday, which should contribute to further share gains.
Over the long run, I think Kohl's is well-positioned. With a low P/E ratio of 13 (data from Yahoo Finance) and strong growth prospects, Kohl's is worth a look for long-term investors. The company has managed expenses well in order to preserve profits, and I expect that when consumer spending finally picks up again, it will thrive. Buy!
Macy's (M) is still my favorite here. The company is in the midst of a mutli-year turnaround and has shown sales and profit growth well above peers. Through its localization iniitative, whcih allows each store to tailor its inventory to lcoal tastes, and better employee training (MAGIC selling), Macy's has made a big comeback. Furthermore, the company has improved its online sales by nearly 40% year over year, largely by offering free shipping.
While the company issued a cautious outlook for the fourth quarter, I think it will handily beat the guidance. Macy's stores will be opening at midnight on Black Friday, which may allow them to gain some business from upscale shoppers who want to shop the night after Thanksgiving. Macy's seems to be the most upscale department store to be opening at midnight. Buy!
Disclosure: I am short JCP.