* All data are as of mid-day Friday, November 28, 2014. Emphasis is on company fundamentals and financial data rather than commentary.
The Department Stores industry has rebounded very nicely indeed since the economic recovery began in early 2009, as pent up discretionary spending generally gets postponed during recessions. A steady increase in job creation and steady decline in unemployment since 2010 have contributed a great deal to keeping that momentum going.
But not all department store chains are created equal, and as such not all have fared equally well. During the economic recovery since the market bottomed in early March of 2009, two of the three largest U.S. Department Store chains - The TJX Companies, Inc. (NYSE: TJX) and Macy's, Inc. (NYSE: M) - have been absolutely on fire, while the third - Kohl's Corp. (NYSE: KSS) - has lagged considerably, as graphed below.
Where the broader market S&P 500 index [black] has gained some 205% and the SPDR Consumer Discretionary Sector ETF (NYSE: XLY) [blue] which the industry belongs to has gained 340%, Kohl's has gained a mere 75%, while TJX and Macy's have gained a spectacular 495% and 840% respectively.
On an annualized basis, where the S&P has averaged 36.18% and the XLY has averaged 60%, Kohl's has averaged 13.24%, TJX has averaged 87.35%, while Macy's has averaged 148.24% per year!
The good times for the industry as a whole are set to continue as Santa Clause has come early this year, at least for those consumers who pay their own gasoline and home heating expenses. Lower gasoline and heating prices have already saved consumers billions since crude oil started falling in late June.
"Consumers could reap $8.4 billion in direct savings in November and December, according to Tom Kloza, global head of energy analysis at the Oil Price Information Service," reports Forbes. The average American spends about $2,600 yearly on gasoline, according to Barclays, so the 20 percent slide in gas prices since June has already saved the average person $520. Long-term, those savings could continue to stack up."
"The extra cash in shoppers' wallets and pocketbooks could help generate nearly half a percentage point in added economic growth in the fourth quarter, and roughly $70 billion more in consumer spending over the next year, according to Barclays," reports The New York Times.
"Economists will focus on holiday sales and how they compare with a year ago. Sales are expected to rise between 4 percent to 4.5 percent compared with a 3.8 percent increase a year ago, according to PNC Financial Services Group," adds The International Business Times.
"We think it's going to be a good holiday season. The drop in gas prices is the icing on the cake for consumers, and it will likely make a good holiday shopping season even better," Stuart Hoffman, senior vice president and chief economist for PNC Financial Services Group expressed his optimism.
Analysts see the Department Stores industry as a whole becoming a major beneficiary of all that increased consumer spending, as tabled below where green indicates outperformance and yellow denotes underperformance.
The industry is expected to grow its earnings at some 1.91 to 2.67 times the broader market's average earnings growth over the immediate two quarters. That stellar growth rate is expected to continue in 2015 at some 1.92 times the market's rate, before sliding to a more sustainable but still robust 1.66 times over the next five years.
Zooming-in a little closer, however, the three largest U.S. companies in the industry are expected to struggle over the immediate term, under-growing the broader market's average growth rate by as much as five-sixths less. It seems analysts don't expect the largest three department stores to benefit from consumers' extra-spending this and next quarters, given the increasing competition from online retailers and discount stores which will likely take much of the cash consumers have saved at the pumps.
But over the longer term, TJX and Macy's are seen finally outgrowing the broader market, while Kohl's is still expected to lag.
Yet there is more than earnings growth to consider when sizing up a company as a potential investment. How do the three compare against one another in other metrics, and which makes the best investment?
Let's answer that by comparing their company fundamentals using the following format: a) financial comparisons, b) estimates and analyst recommendations, and c) rankings with accompanying data table. As we compare each metric, the best performing company will be shaded green while the worst performing will be shaded yellow, which will later be tallied for the final ranking.
A) Financial Comparisons
• Market Capitalization: While company size does not necessarily imply an advantage and is thus not ranked, it is important as a denominator against which other financial data will be compared for ranking.
• Growth: Since revenues and expenses can vary greatly from one season to another, growth is measured on a year-over-year quarterly basis, where Q1 of this year is compared to Q1 of the previous year, for example.
In the most recently reported quarter, TJX and Macy's posted the greatest revenue and earnings growth year-over-year respectively, while Kohl's reported the least, even shrinkage.
• Profitability: A company's margins are important in determining how much profit the company generates from its sales. Operating margin indicates the percentage earned after operating costs, such as labor, materials, and overhead. Profit margin indicates the profit left over after operating costs plus all other costs, including debt, interest, taxes and depreciation.
Of our three contestants, TJX operated with the widest profit and operating margins, while Kohl's contended with the narrowest.
• Management Effectiveness: Shareholders are keenly interested in management's ability to do more with what has been given to it. Management's effectiveness is measured by the returns generated from the assets under its control, and from the equity invested into the company by shareholders.
For their managerial performance, TJX's management team delivered the greatest returns on assets and equity, while Kohls' team delivered the least on both.
• Earnings Per Share: Of all the metrics measuring a company's income, earnings per share is probably the most meaningful to shareholders, as this represents the value that the company is adding to each share outstanding. Since the number of shares outstanding varies from company to company, I prefer to convert EPS into a percentage of the current stock price to better determine where an investment could gain the most value.
Of the three companies here compared, Kohl's provides common stock holders with the greatest diluted earnings per share gain as a percentage of its current share price, while TJX's DEPS over current stock price is lowest.
• Share Price Value: Even if a company outperforms its peers on all the above metrics, however, investors may still shy away from its stock if its price is already trading too high. This is where the stock price relative to forward earnings and company book value comes under scrutiny, as well as the stock price relative to earnings relative to earnings growth, known as the PEG ratio. Lower ratios indicate the stock price is currently trading at a cheaper price than its peers, and might thus be a bargain.
Among our three combatants, Macys' stock is the cheapest relative to forward earnings and five-year PEG, while Kohls' stock is cheapest relative to company book value. At the overpriced end of the scale, TJX's stock is the most overvalued relative to earnings and book, while Kohls' is the most overpriced relative to PEG.
B) Estimates and Analyst Recommendations
Of course, no matter how skilled we perceive ourselves to be at gauging a stock's prospects as an investment, we'd be wise to at least consider what professional analysts and the companies themselves are projecting - including estimated future earnings per share and the growth rate of those earnings, stock price targets, and buy/sell recommendations.
• Earnings Estimates: To properly compare estimated future earnings per share across multiple companies, we would need to convert them into a percentage of their stocks' current prices.
Of our three specimens, Macy's offers the highest percentages of earnings over current stock price for the current quarter and 2015, while TJX offers it for next quarter. At the low end of the spectrum, TJX offers the lowest percentages for most time periods, while Macy's offers it for next quarter.
• Earnings Growth: For long-term investors this metric is one of the most important to consider, as it denotes the percentage by which earnings are expected to grow or shrink as compared to earnings from corresponding periods a year prior.
For earnings growth, TJX offers the greatest growth rate overall, while Macy's offers it for next quarter and over the next five years. At the low end of the scale, Macy's offers the slowest growth for the current quarter while Kohl's offers it the rest of the way.
• Price Targets: Like earnings estimates above, a company's stock price targets must also be converted into a percentage of its current price to properly compare multiple companies.
For their high, mean and low price targets over the coming 12 months, analysts believe Macy's stock offers the least upside potential and greatest downside risk, while Kohl's offers the greatest upside and TJX offers the least downside.
• Buy/Sell Recommendations: After all is said and done, perhaps the one gauge that sums it all up are analyst recommendations. These have been converted into the percentage of analysts recommending each level. However, I factor only the strong buy and buy recommendations into the ranking. Hold, underperform and sell recommendations are not ranked since they are determined after determining the winners of the strong buy and buy categories, and would only be negating those winners of their duly earned titles.
Of our three contenders, Macy's is best recommended with 4 strong buys and 12 buys representing a combined 72.73% of its 22 analysts, followed by TJX with 7 strong buy and 10 buy recommendations representing 58.62% of its 29 analysts, and lastly by Kohl's with 4 strong buy and 7 buy ratings representing 47.82% of its 23 analysts.
Having crunched all the numbers and compared all the projections, the time has come to tally up the wins and losses and rank our three competitors against one another.
In the table below you will find all of the data considered above plus a few others not reviewed. Here is where using a company's market cap as a denominator comes into play, as much of the data in the table has been converted into a percentage of market cap for a fair comparison.
The first and last placed companies are shaded. We then add together each company's finishes to determine its overall ranking, with first place finishes counting as merits while last place finishes count as demerits.
And the winner is… The TJX Companies, displaying the greatest investment value overall, outperforming in 13 metrics and underperforming in 9 for a net score of +4, followed not far behind by Macy's, outperforming in 8 metrics and underperforming in 7 for a net score of +1, with Kohl's left with just a bunch of naked mannequins in the window, outperforming in 10 metrics and underperforming in 15 for a net score of -5.
Where the Department Stores industry is expected to outperform the S&P broader market substantially this and next quarters, significantly in 2015, and moderately beyond, the three largest U.S. companies in the space are expected to struggle over this holiday season with earnings under-growing the broader market's average by a significant amount. Yet over 2015 and beyond, at least two - TJX and Macy's - are seen finally outgrowing the S&P.
After taking all company fundamentals into account, TJX offers the more complete investment experience given its lowest debt over market cap, highest trailing revenue growth, widest profit and operating margins, highest returns on assets and equity, highest EBITDA over revenue, highest future earnings over current stock price, highest future earnings growth overall, best low price target, and most analyst strong buy recommendations - comfortably winning the Department Stores industry competition.
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