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Bank of America Merrill Lynch research analyst Robert F. Ohmes and his team published a report titled “Holiday Trend Update: Predicting the Outperformers” on December 21, 2011. The report isn't publicly available, so we will summarize the important points. The focus of this report was on retailer’s pre-Christmas season performance. Analysts have identified outperformers in the sector on the basis of current and future trends in the retail markets. Though pressures from macro-economic and competitive environment continue, analysts expect athletic retailers to outperform their peers.

Dick’s Sporting Goods (DKS) has been rated a buy by BofA Merrill Lynch analysts on the basis of expectations regarding margin rebound from the trough observed in 2010, along with gains in market share and growth in area coverage. The analysts think strong comp sales guidance and strong sales in high margin footwear and apparel further support the positive outlook for the company. The price target set by BofA Merrill Lynch is $46, 20x F13 EPS estimates and in-line with its historical average. However, risks may emanate from further weakening of the macro environment, higher than expected cost pressures and unexpected price competition. Steve Cohen’s SAC Capital had $59 million invested in Dick's at the end of September.

Finish Line (FINL) has also been rated buy by the analysts on the back of favorable athletic trends, which should support top-line compass and boost margins. The analysts set a Price Objective for Finish Line at $25 where it will trade at 14-15x F13 EPS estimates. Although the targeted multiples are at a slight premium compared to the average P/E for its peers, strong exposure to athletic goods in such a favorable environment would justify the premium. Risks, however, would be unanticipated decline in traffic at U.S. malls, slowing of ASP growth and loss of market share to other sporting goods retailers. Moreover, occupancy and SGA costs would also play an important role in determining the profitability for the company. Chuck Royce had the largest position in Finish Line among the funds we are tracking.

Foot Locker (FL) has been ranked as a buy by BofA Merrill Lynch analysts given favorable athletic trends, which should support top-line comps and boost margins on the higher side. Price Objective for the stock stands at $29 at 15x F13 EPS estimates. Target multiple is at a premium to the average P/E for its comparable peers. BofA analysts think that the premium is justified through the strong cash flow generation capability of Foot Locker, which would be supported by lower capex initiatives regarding reduction of expenses and managing low inventory; along with rising ASPs and maintaining dividends to the shareholders. However, risks in this case would be weakening trends and macro-economic factors. Slowing traffic into the malls, increased reliance on key footwear vendors, and potential loss of market share to athletic goods retailers also pose additional threats to the estimates.

Skullcandy Inc (SKUL) is a favorite holiday trade idea and hence is also included in BofA's buy call list. Price target for the company stands at $22 based on 20x 2012E EPS and 12.4x EV/EBITDA. BofA analysts think that the company is also set to grab additional market share given its established action sports brand and innovative production pipeline. Skullcandy is expected to gain market share in the growing international headphone and audio accessories market too. Analysts have forecasted 20% CAGR for revenues for the next three years, which is expected to translate into 23% CAGR for EPS over the same period. Risks to the estimates originate from execution risks related with the firm, adverse changes in consumer spending habits, challenging environment and any pressure on gross margins.

The Jones Group Inc (JNY) is also on the BofA Merrill Lynch buy call list on the basis of cheap valuations. Currently, Jones Group is trading at near-trough levels of 6-7x EPS. Price objective of $14 suggests a targeted 2012E EPS 10-11x, which is slightly lower than the historical branded apparel peer average of 9-15x. Lower multiples are justified by a challenging sourcing environment. However downside risks might generate from weakening U.S. retail activity and lower than expected accretion from Geiger. Challenging womens apparel markets, high sales concentration at department stores along with negative profits recorded at owned retail stores may put pressure on the stock.

Wal-Mart Stores (WMT) is currently being favored by BofA Merrill Lynch on the basis of improving same store sales, growth opportunities abroad, consistent profitability and growth outlook for the international business with a high ROIC of 13-14% in FY12E. Price objective for the stock stands at $65 with F13E 13-14x P/E, which is in-line with its past 3-5 years 2 year forward multiple. Market share for Wal-Mart is improving, backed by customer traffic in the recent holiday season, attracted by Everyday Low Price, Super Saturday, Black Friday and many other programs. Improvements in on-shelf availability and ongoing expansion of multi-channel distribution have helped offset recent pressures on gross margins. Risks for the company are continued rotation into discretionary retailing stocks, adverse impact of change in currency rates, deflationary pressures arising from competition and a global slow-down. Warren Buffett is the largest holder of Wal-Mart among the 360 funds we are tracking (see Warren Buffett’s top stock picks).

We aren’t as bullish as BofA Merrill Lynch about the athletic retailers. Their multiples are too high compared to the rest of the market. Wal-Mart and Target (TGT) are conservative plays that we like in the retail space. Another name, we think, investors should consider is Nike (NKE) which just posted better than expected results and is benefiting from emerging market growth.

Source: BofA's Athletic Retailer Winners Of The Holiday Season