In a prior article the secondary market for gift cards was used to provide insights into the value propositions of different companies. Based on this work stocks were ranked based on how much value consumers derive from spending on their products. The prior article investigated how this information could be used to identify the best stocks to buy right now.
This article turns our attention to the six companies that stick out as creating the least perception of value for their customers: Zumiez ZUMZ, Jamba Juice JMBA, J.C. Penney JCP, Urban Outfitters URBN, Callaway Golf ELY, and American Apparel APP. The vulnerability of the marketing position of these companies to an economic downturn is discussed. Their valuations are considered in light of these risks.
The Secondary Market for Gift Cards
Gift cards are resold on ebay.com in auctions and in fixed-price listings. They are also brokered by plasticjungle.com and abcgiftcards.com. Each of these markets allows the owners of gift cards to convert them into cash and for buyers of gift cards to purchase them below their dollar balance.
Consumer attitudes are revealed by the degree to which gift cards trade at discounts to their remaining balances. Deeper discounts are demanded by bidders who feel that they would be losing value in a gift card relative to cash. As a baseline, Amazon.com (AMZN) gift cards regularly trade near their balances on Ebay. Similarly, Wal-Mart (WMT) gift cards often trade below a 4% discount.
Gift Card Data
Since ebay.com often operates by auction and the other gift card sites have inventories of many gift cards, the listed discounts are likely near what consumers feel spending at these establishments is worth in USD. Only publicly traded establishments with gift card discounts that could be confirmed by two sites are listed:
B to C Company | Ticker | Avg Discount | ABCgiftcards | PlasticJungle | Ebay | Beta |
Target | 3% | 5% | 1% | 0.89 | ||
Walgreens | 3% | 3% | 4% | 0.99 | ||
Best Buy | 5% | 4% | 6% | 1.3 | ||
Staples | 5% | 5% | 6% | 0.93 | ||
CVS | 6% | 6% | 6% | 0.74 | ||
Office Depot | 7% | 7% | 7% | 3.3 | ||
Marriott | 7% | 7% | 7% | 1.48 | ||
Lowe's | 8% | 8% | 7% | 1.19 | ||
Olive Garden | 8% | 8% | 8% | 0.85 | ||
Sears / Kmart | 8% | 8% | 8% | 1.99 | ||
Home Depot | 8% | 7% | 9% | 0.83 | ||
Ross | 9% | 12% | 6% | 0.71 | ||
Tiffany & Co. | 9% | 8% | 10% | 1.81 | ||
Bed Bath & Beyond | 10% | 8% | 12% | 1.04 | ||
Dell | 10% | 10% | 10% | 1.41 | ||
Christopher Banks | 10% | 10% | 10% | 1.95 | ||
Williams-Sonoma | 10% | 10% | 10% | 1.72 | ||
McCormick & Schmick's | 10% | 11% | 9% | 0.42 | ||
Kohl's | 10% | 10% | 10% | 0.85 | ||
Domino's Pizza | 11% | 10% | 11% | 1.24 | ||
TJ Maxx | 11% | 10% | 11% | 0.58 | ||
Chico's | 11% | 15% | 7% | 1.77 | ||
Columbia | 11% | 12% | 10% | 1.06 | ||
Starbucks | 11% | 8% | 14% | 1.22 | ||
Petsmart | 11% | 16% | 6% | 0.72 | ||
Regal Entertainment | 12% | 11% | 12% | 0.93 | ||
OfficeMax | 12% | 11% | 12.5% | 2.57 | ||
Bebe | 12% | 12% | 13% | 1.2 | ||
Dick's Sporting Goods | 13% | 13% | 12% | 1.33 | ||
Barnes & Noble | 13% | 12% | 14% | 1.01 | ||
Build-A-Bear Workshop | 14% | 12% | 15% | 1.56 | ||
Zumiez | ZUMZ | 18% | 20% | 15% | 1.87 | |
Jamba Juice | JMBA | 19% | 21% | 18% | 2.52 | |
JCPenney | JCP | 20% | 28% | 12% | 1.85 | |
Urban Outfitters | URBN | 22% | 25% | 18% | 1.01 | |
Callaway Golf | ELY | 26% | 25% | 27% | 1.23 | |
American Apparel | APP | 26% | 28% | 25% | 2.35 |
Data Collected 9.12.2012
Data Analysis
The lower the discount, the more consumers (1) consider goods and services good value for money or (2) consider the goods and services of a company a necessity. As it turns out, there is a weak correlation between a company's beta and the discount its gift cards trade for in the secondary market:
(click to enlarge)
Since the degree to which goods and services are considered staples is captured in the trend line, the distance below the trend line is the extent to which consumers regard spending at a company as valuable.
Zumiez, Jamba Juice, J.C. Penney, Urban Outfitters, Callaway Golf, and American Apparel all trade above trend. This means that among participants in the secondary gift card market, these firms provide poor value for money. Consumers will spend less on their goods and switch to goods and services they perceive as better values in the event of an economic downturn.
Investors should be worried about such a consumer perception and should require attractive valuations and growth projections to compensate for this risk. Relevant metrics are presented below:
Company | P/S | P/B | P/E | P/FCF | EPS growth past 5 years | EPS growth next 5 years | Sales growth past 5 years |
American Apparel | 0.26 | 5.22 | N/A | N/A | -50.6% | 70.0% | 13.9% |
J. C. Penney | 0.41 | 1.73 | N/A | N/A | -28.6% | 20.3% | -2.8% |
Callaway Golf | 0.48 | 0.72 | N/A | N/A | -21.3% | 11.5% | -2.7% |
Jamba | 0.76 | 7.21 | N/A | 27.6 | 0.0% | 15.0% | 57.8% |
Zumiez | 1.44 | 3.08 | 21.83 | 25.67 | 10.6% | 19.6% | 13.3% |
Urban Outfitters | 2.2 | 4.84 | 31.39 | N/A | 11.5% | 17.4% | 15.1% |
None of these stocks offers particularly attractive valuations. All lack attractive price-to-earnings and price-to-free cash flow ratios. In this sense, they are not quality value plays. None of them is trading at clear fire-sale valuations either, except perhaps Callaway Golf, which trades at low price-to-sales and price-to-book values. Speculators seeking a risky play could consider Callaway Golf further but should ignore the other stocks on this list that are not strikingly cheap.
Please read the article disclaimer.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
