Five Retailers for Falling Gas Prices 14 comments
an article to
-
Font Size:
-
Print
- TweetThis
Retailers stand to benefit greatly from falling gas prices. As the AAA report below shows, gas prices have fallen $0.30 from their peak. At this point in the cycle, it may not matter which retailer you buy as they could all rally strong with the sector. Some of our favorites are Chipotle Mexican Grill (CMG), Dicks Sporting Goods (DKS), Sears Holdings (SHLD), Kona Grill (KONA), and Jamba Juice (JMBA).
U.S. retail gasoline prices edged down to $3.81 a gallon, on average, on Monday from $3.818 a day earlier, according to auto club AAA, the Oil Price Information Service and Wright Express. On July 17, the average hit a record $4.114.
That's a substantial drop in gas prices in less then a month. This should provide huge relief to consumers and allow for more spending at stores and restaurants. Most of the retailers that have recently reported results were hesitant to talk bullish because of the drop in gas prices. In most cases though, they hinted that results had improved since mid July.
Of the stocks mentioned above, CMG and DKS are by far best of breed retailers. Both have the regional to national plays that are so attractive in the retail space and both dominate the competition. CMG reported surprisingly strong 7% comps for Q2 but missed earnings and saw the stock price swoon. DKS on the other hand warned of lower earnings and forecast negative comps. Both have seen their respective stocks drop more then 50% from highs providing for a lot of upside movement as gas prices decline and the retail sector garners more attention. Look for these 2 stocks to move first in this retail rally.
SHLD will likely follow along as well since its a well known retailer. Our firm has invested in SHLD more for the commercial real estate play but it continues to trade as if the reason to own SHLD is for the retail exposure. Look for it to continue to bounce higher.
The remaining 2 plays, KONA and JMBA, are much more speculative. Both stocks have absolutely been crushed as they both recently reported substantially negative comps. The target market for these 2 companies is more the upper middle class which has been down shifting its spending so if anything these 2 will likely get the biggest bounces from lower gas prices.
KONA is a 20 chain restaurant that continues to expand at a rapid clip. Management eventually sees a 100 store operation, but they must improve on the -5.6% comps to continue expansion. Restaurant operating margins have constantly been in the 20% range until the recent softness in comps.
JMBA continues to be the troubled child of the group. They have a well established brand and strong customer loyalty yet they have been unable to consistently turn a profit. A heavy reliance on CA stores in the last couple of years has hidden strong store expansion and also undermined the CEOs plans to expand margins by keeping expenses flat while growing revenue. Unfortunately when comps decline 7% that plan doesn't work out and the CEO is forced to resign. Hopefully JMBA is able to find a dynamic CEO that can lead this strong brand to profitable growth.
Our recommendation is to initially focus on the stronger stocks like CMG, DKS, and even SHLD for the initial retail rally, but if gas prices fall further and the economy strengthens then look to buy KONA and JMBA for bigger gains. These 2 stand to benefit the most from a return of the US consumer.
Disclosure: Long SHLD, KONA and JMBA.
Related Articles
|
-
The Seeking Alpha 100
See allThe top 100 stock
market authors
selected for publication in the last week
Seeking Alpha 100 » -
Fastest Climbers
Those with the largestSee all
increase in followers
in the last week
Fastest Climbers » -
Top Commenters
Top commenters,
as ranked by their peers-
1
User 353732
-
2
Moon Kil Woong
-
3
doubleguns
-
4
optionsgirl
-
5
Mayascribe
Top Commenters » -
1
-
Top Instabloggers
The 100 most activeSee all
Instabloggers.
Top Instabloggers » -
Top StockTalkers
TopSee all
StockTalkers.
Top StockTalkers »
I want to have way more faith in our population than that. Runaway debt is what's gotten us into the mess we're in, but people are starting to realize that and consequently the savings rate, which has over the last decade gone negative for the first time ever, more recently has risen from 0.3% to 2.6%.
If Americans respond to a 30 cent drop in the price of gas by immediately running to the mall, we're in even worse shape than I thought.
You guys are pathetic, you're talking saving a few measly dollars. And that is going to get the consumers to the stores?
Real inflation is 10-15%, that means saving $6.00 on a fillup is nothing because the consumer is getting eatened by other expenses. Besides now he can use the $6. to pay previous extra $6.00 he spent last month to fill his tank.
But hey, lets sucker the average investor into believing this garbage so we can sell our junk stock we bought last month cheap at a nice fat profit this month.
Listen to the credit card companies, people are adding to their credit at record levels just to pay bills. Do you real think a small drop in oil prices are going to have a effect? And what about heating bills this winter? Dealers are not even offering contracts in many parts of the country. When prices on many things go up they seldom go down afterwards. Sure, high energy caused a lot of this. But once the genie is out of the bottle is sure is hard to get it back in.
In my town EVERYTHING is up. We're not in a economically hard hit area (I thought) but at our annual fund raiser this last weekend the attendance was horrible and we priced everything at last years prices so we took a double hit.
Sometimes when you stare at a computer screen all day you miss the world around you. Stores are empty, jobs are scarce, money is tight, people aren't sure of the future, most seem a bit apprehensive in fact. People I know are putting off large purchases for now. Get out and see for your self.
The rest of the stuff you mention will all be cured by lower commodity prices such as oil and gas. The bad is already factored into the stock prices of the companies I mentioned. All down more then 50% from highs. How low do you think they should go? The inflation bug has turned. Things will only get better from here.
> CMG is far from cheap with a forward P/E of 24 and a EV/EBITDA of 13.25
> DKS is probably achieving cheap status and has a solid business model and OK balance sheet. But much of its diversified inventory makes it susceptible to consumer discretionary spending. I would consider buying if it drops another 15-20% as a margin of safety.
> SHLD - There is not much of retail business model here. The retail experience sucks and if you've been to a Kmart lately you'd think you just walked in to a Bloomies because it's so pricey. Lampert is clearly way above his head on this one, he is not a retailer. The real estate angle on this one is not good enough reason to buy.
> KONA - A want to sell everything sushi/pizza/burger/tac... with a twist of hawaiian restaurant. No thanks. BWLD yes.
> JMBA - Total speculation. Put your Vegas money on this one and be ready to hold for 5 years.
______________________...
On my retail front, custom clothing is still selling well, however more so in the opening price points than before. Custom suits used to average $1,500 to $1,600 just months ago while customers are now inclined to purchase in the $1,000 to $1,100 range.
Consumers are currently more concerned with value than luxury. It's less a matter of 'what I want' and more 'what do I need.' In a slower economy, with fewer clients to pursue, business professionals must use every advantage they can to win over new & existing customers. Their personal appearance and that of their employees (see my site for corporate logo wear) must be at its best. If you look successful then you will instill confidence in your clients about your service and products. On the flip side, if you look broke, if you look like you really NEED the business, you are not as likely to get it. You have to dress the part if you want the lead role.
The value in custom clothing is that it leaves nothing to chance. The fit is perfect, the style is your own and if you can find it at the right price you will earn dividends because of how you are perceived by clients and prospects.
My Best,
Jeff Collins
Professional Haberdasher
www.MyHaberdasher.com
LIZ and TWB could be a couple of other stocks to watch. They both gave guidance that provide for decent upside on their stocks but the momentum guys sold the stocks. For TWB, we're probably going to wait until the new plan unfolds more before seriously looking at investing though the Justice brand does offer a compelling investment thesis.
I've also been in DKS profitably, but I have to say that shopping in their stores (I've been only in an Indianapolis and a Tampa store) has been a despicable experience. Signage and helpful employees are in notable absence. I've resigned myself to staying with The Sports Authority, which is only marginally better, and the experience has been a damper on new enthusiasn for the stock.
Gas is now down close to $0.40 and will continue to fall. Now people save $8 on a fillup and can buy 2 smoothies. :-) It'll soon be $10, 12, 14, etc. The time to buy retailers is before the reduced prices get turned into sales.