A recent walk-through of the fundamentals of a number of retailing stocks leaves me with more questions than answers.
Primarily, why are the stocks in this list outperforming?
All of them are extremely overvalued with both high Price/Earnings ratios and relatively low, often negative growth rates. All are vulnerable to weakness in the consumer sector. None of these comapanies has a massive online presence that can be used to counteract high oil prices. Finally, with the possible (and unlikely) exception of Foot Locker, none of these companies appears likely to benefit from the weaker dollar. Yet, all have seemed to chug along in recent days and weeks.
Cache (Nasdaq: CACH)
Price as of yesterday's close: 14.32
The first company that I considered was Cache (Nasdaq: CACH), a mall-based specialty retailer targeting 'style-conscious women', with a market cap just shy of 200 million dollars.
On July 24, the company reported a higher net income for the second quarter that slightly exceeded analyst estimates, maintained its previous guidance for the third and fourth quarters and raised the low end of 2008 fiscal year outlook. Notwithstanding, the company may remain overvalued with a Price/Earnings ratio of over 42 and an extremely high Price/Cash Flow per Share.
Another important negative factor is that the company's core demographic is particularly vulnerable. Unlike the teenage market, which is usually the last clothing market to fail, the 'style conscious woman' is vulnerable to the specter of the mortgage and credit crisis, which are far from over. Further, this company is not shielded from the weakness of the dollar, as all of its stores are in the United States. Finally, as this company is a mall-based retailer, it remains subject to rising oil, and is likely to suffer if and when oil resumes its climb.
From a technical standpoint, on the daily charts, it appears that the company's stock is trading slightly above its beginning-of-June resistance level at approximately 14.2, and that it may be in a consolidation mode. Moreover, it is worth noting that Cache's gains of the last few days have been marked by relatively low volume, which may signify waning buying interest. The next real level of downward support appears to be at approximately 12.5.
Foot Locker (NYSE: FL)
Price as of yesterday's close: 15.10
Another company on my radar is Foot Locker (NYSE: FL), a footwear retailer with a market cap of approximately 2.2 billion dollars. Unlike Cache, Foot Locker has a global presence, with stores in North America, Europe and Australia/New Zealand. So, it is probably not as vulnerable as Cache to the dollar's weakness. Like Cache, however, it is also a mall based retailer and, as such is subject to the economic downturn and high oil prices. Also, like Cache, it is trading at an extremely high Price/Earnings ratio – in this case, nearly 62.
On the technical side, Foot Locker is trading at 15.10, and was up over 4% Tuesday and up another approximately 5% on Wednesday, after being down over 3% on Monday. On the daily chart, the stock appears to have broken resistance at the 14.75-14.9 level, and it will be interesting to see whether this can hold. Notably, these moves were all made on relatively average volume. There may be downward support at approximately 14 and also 13.1-13.3, which could create a nice short play.
Haverty Furniture Companies (NYSE: HVT)
Price as of yesterday's close: 11.42
Haverty is a specialty retailer of residential furniture and accessories with a market cap of approximately 240 million dollars. As of December 31, 2007, it operated over 123 stores serving 81 cities in 17 states in the Southern and Midwest regions of the United States. Given its niche, Haverty is particularly vulnerable to the vicissitudes of the housing market. Also, like the other picks on this list, it is vulnerable to any gains in oil as well as any further diminishment of consumer income.
Surprisingly, over the last month, the company's share price has gone up over 12% in the last month and has climbed over 22% in the last three months. This is particularly confusing as the share climb remains virtually undaunted by the company's announcements on July 8 of: (a) extremely weak June sales growth (negative 26.2%); and (b) second quarter sales growth (a drop of 10% from second quarter, 2007) that fell below analyst estimates. The company has an earnings conference call scheduled for August 5th, which may provide some additional guidance.
As far as valuation, Haverty's Price/Earnings ratio exceeds 140 and its Price/Cash Flow per Share is also extremely high. These factors may provide a fundamental set up for a potential fall, and are further accentuated when taken in tandem with: (a) the company's negative sales and net income growth; and (b) the fact that the company's climb has been almost completely unfettered since nearly the first week in June (when it was trading in the 9 dollar range). On the plus side, however, Haverty owns a fairly large percentage of its properties and has a strong (i.e. relatively low) Price/Book Value per Share.
From a technical standpoint, on the daily charts, Haverty appears to be trading very close to a point of downward support at approximately 11. In addition, both yesterday's gain and the gain on Tuesday were marked by relatively low volume, signifying that the buyers may have curbed their enthusiasm a bit towards this stock. If Haverty shares break the 11 level, there may be additional downward support at both the 10.5-10.6 level and at the 10 level, all of which could create interesting gains on the short side.
Zale Corporation (NYSE: ZLC)
Price as of yesterday's close – 22.09
(Note: there was a further loss of approximately 1.1% in after hours trading)
Zale Corporation is a specialty retailer of jewelry in North America with a market cap of approximately 780 million dollars. The company's business is concentrated in the United States, Canada and Puerto Rico, and, is thus, unlikely to benefit (and more likely to be negatively affected) from a weaker dollar. Further, because of the nature of its business, Zale is vulnerable not only to high oil prices but also to high gold prices as well as the likely continued potential downturn in consumer spending.
Notably, over the last few days, a number of institutions and funds have announced reductions in their holdings of Zale stock including the State Teachers Retirement System of Ohio (July 25), the GMO Value Fund (July 24) and Cooke and Bieler Lp (July 19). In addition, like the other companies on this list, it has an extremely high Price/Earnings ratio (approximately 57).
From a technical standpoint, on the daily charts, the company's stock is trading very close to what appears to be a strong resistance level (that has held since approximately April) of 22. On Tuesday, Zale's stock climbed over 7%, a level to which it more or less held-to yesterday. Notably, both moves were made on relatively low volume, a factor that may be particularly prescient regarding Tuesday's large move. Moreover, the company's share price has risen virtually unfettered since the middle of this month, and has increased over 10% in the last five days alone. The next point of downward support appears to be at approximately 20-20.2.
Disclosure: The author does not hold any positions in the above securities as of the date of this article and the contents of this article do not constitute investment advice and comprise solely the author's personal opinions.