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Collins Stewart is a London-based independent financial advisory group. On December 19 Collins Stewart published an initiation report entitled “Retail & Consumer Products” where they argue that the valuation of dollar stores has been fully priced in, rent to own operators ((RTOs)) will benefit from tough credit environment, home related names will be hit because of weakness in housing whereas the “health customer base” in case of home furnishing names will support these stocks. From the retail space they have rated 6 stocks as buys and below we will discuss their investment thesis on these stocks along with a neutral-rated company.

Williams-Sonoma (NYSE:WSM) is a retailer of products for homes, and it operates brands such as Williams-Sonoma, Pottery Barn, and West Elm. Currently, it is the market leader in online retail with $1.2 billion in revenue which was three times higher than that of its next competitor.

It has been given buy rating from the Collins’ analysts. Collins Stewart expects the company’s eCommerce sales to reach 38% of total revenues as an increasing amount of customers are using different means to buy WSM products. The company has a partnership with FiftyOne Global Ecommerce through which it is able to ship to more than 80 countries.

Shares of WSM are currently trading at $37.76 and are expected to go north of $55 by the end of next year. Its share price has fluctuated between a range of $27.90 and $45.48 over the last 52 weeks. The company has market capitalization of $3.99 billion and the estimated P/E ratio in 2012 will be 14.5x. Stephen Mandel’s Lone Pine Capital had $179 million invested in WSM at the end of September.

Bed Bath & Beyond (NASDAQ:BBBY) is a chain of retail stores which sells domestic merchandise and home furnishings. Collins Stewart has given the company a buy rating, in part due to its industry-leading position. With an extremely low level of ecommerce penetration, the opportunity for the company is enormous and Collins Stewart believes that BBBY has the cash available for such an investment.

The company’s fastest growing concept is buybuy Baby, which has increased 55% year over year, with the Christmas Tree Shops concept driving growth too. Collins Stewart also sees a potential of increasing long-term margins if the company uses DCs instead of shipping directly to stores.

Currently, its shares are trading at $61.62 per share and are expected to reach $69 by 2012. The company has market capitalization of $15.09 billion and pays $7.07 cash/share. Its P/E ratio is 14x while its EV/EBITDA ratio is 7.3x.

Big Lots (NYSE:BIG) sells merchandise related to consumables, furniture, home, hardlines, seasonal, and other categories. Collins Stewart recommends buying this stock. The biggest category of Big Lot is consumables, which represent 30% of total sales, and is continuously improving with high single digit growth. They think that its holiday assortment has been rather appealing with comps being positive through most of November.

Pricing has become rather aggressive due to competition, with Big Lots moving towards lower-margin products which have a higher demand. Collins Stewart expects Big Lots to perform better than Street consensus with an expected 7.3% increase in sales. Most recently, the company acquired Liquidation World in Canada.

Big Lots has shares currently being traded at $37.54, which are expected to go north of $58 by the end of 2012. The shares have traded within a range of $27.82 and $44.44 over the last 52 weeks. The company has market capitalization of $2.4 billion with $59.95 cash/share value. Estimate of P/E for 2012 is 10.4x and that 5.4x of EV/EBITDA.

Rent-A-Center, Inc. (NASDAQ:RCII) is a rent-to-own operator. The company has been given a buy rating by Collins Stewart, in part due to the ability of its business model to survive the economic cycles. RCII is the market leader in the RTO industry and is expanding into Canada and Mexico, too. RAC kiosks are available for customers who cannot find the necessary credit, enabling the company to obtain high-credit shoppers and generating roughly 10% more revenue per contract than the average RTO agreement. RAC kiosks generate profit within a period of 6 to 8 months and RCII is trying to aggressively expand them. Collins’ analysts believe that with expansions into Mexico and Canada, RCII is seeing a sizeable opportunity for RTO operations.

Currently, its shares are trading at $37 per share and are expected to go north of $49. The company has market capitalization of $2.12 billion and a P/E ratio of 10.9x is expected in 2012. EV/EBITDA of 6.4x is expected for the next year.

Aaron’s Inc. (NYSE:AAN), a specialty retailer, has been given a buy rating by Collins Stewart. It offers rental contracts to customer who cannot afford or obtain the financing needed, giving the company an increase in revenue and customer counts. Aaron’s also has a HomeSmart concept whereby customers can pay weekly, giving it an entry into the weekly pay space with less overhead expenses. The company has also invested in the European market, notably the United Kingdom, thus expanding its customer base further.

Shares of Aaron’s are currently trading at $29.39 and are expected to be $29 by the end of 2012. Over the last 52 weeks, its shares have traded within a range of $19.16 and $29.42. Market capitalization for the company stands at $2.05 billion with an expected P/E ratio of 13.4x by 2012. Diamond Hill Capital had the largest stake in AAN among the 350 hedge funds we are tracking.

Lumber Liquidators (NYSE:LL) is a specialty retailer of hardwood flooring, and it has been given a buy rating by Collins Stewart. The company has started a sourcing initiative where it aims to reduce cost while increasing productivity. Collins’ analysts say that its category-by-category line review led it to have an increase in vendor base and concessions in costs.

Lumber Liquidators is acquiring Sequoia Floorings in China, essentially getting rid of the middle-man and lowering product costs while also benefitting from better relationships with vendor mills. Collins Stewart says that this company has the highest unit growth potential in this industry with a unit growth of 16% projected for 2012.

Currently, shares of the company are trading at $16.95 and are expected to go north of $26 by the end of next year. Market capitalization stands at $0.44 billion and the company has cash/share value of $1.33. P/E, expected in 2012, is 11.8x while EV/EBITDA is 5.9x.

Home Depot (NYSE:HD), a home improvement retailer, has been given a neutral rating by Collins Stewart. A totally of 19 rapid deployment centers (RDCs) were started, allowing for shorter lead times and stoppage of vendor minimums (allowing for correct stocking of items). Collins Stewart thinks that the company’s margins are expected to benefit by 40bps with the implementation of RDCs.

Shares of the company are currently trading at $41.57 and are expected to reach a target of $44 by the end of next year. The shares have traded within a range of $28.13 to $40.72 over the last 52 weeks. Market capitalization of the company is $62.57 billion with a net debt of $14.2 billion. Expectations for P/E in 2012 are 14.7x while those of EV/EBITDA are 8.9x. Columbus Circle Investors reported to have $147 million in HD at the end of September.

Source: Collins Stewart's Picks: Best Retail And Consumer Stocks For 2012