The 7 Best Retail Brands In The U.S. - Buy, Sell Or Hold?

Includes: BBY, CVS, HD, TGT, TPR, WBA, WMT
by: Greg Group

Brand plays an important role in the shopping decisions made each day by consumers. It is the brand that creates value for a company that is translated into financial profit. A brand touches and benefits its organization from attracting and retaining talent to delivering on customer expectation. The parts come together so that forecast financial performance project economic profits that are multiplied by the Role of Brand to reveal branded earnings. These branded earnings are discounted back to a present value, based on the Brand Strength, and totaled to arrive at a Brand Value. The results are published by Interbrand in the "Best Retail Brands 2012." Using the brand information from this report, I have evaluated the stock valuation of each company to determine if their stock is a buy, hold or sell. This is how the top brands measure up in terms of their stock valuations.

1. Wal-Mart (NYSE:WMT) - With 180 million shoppers annually, $260 billion in U.S. sales, and a legitimate claim to 1.7% of the U.S. GDP, Wal-Mart remains number one on the Most Valuable U.S. Retail Brands list by a huge margin. Wal-Mart's brand value decreased slightly over the previous year and has not returned to its 2010 height, as shoppers spread their spending to other stores. In response, the company is bringing its massive strength in innovation, low price guarantees and supply chain mastery to bear. Stores continue to evolve and departments have improved for an easier, more enjoyable shopping experience. Effective marketing efforts and relevant online strategies, along with aggressive fairness, philanthropic and sustainability initiatives, demonstrate the company's tireless dedication to betterment.

Stock Valuation: WMT is trading close to its fair value of $59.56 so it is a HOLD. Wal-Mart has a current dividend yield of 2.7% with an 18% compound annual growth rate (CAGR). This CAGR results in a future yield on cost of 14% in 10 years.

2. Target (NYSE:TGT) - Target holds its place as the preferred discount mass merchant of a loyal, satisfied base of affluent shoppers under age 45, while fine tuning its owned brands and partnering with high fashion designers. In 2011, the company picked up the pace of its remodeling, adding grocery to hundreds more general merchandise stores to drive frequency. Select cities are welcoming smaller CityTarget stores. In Canada, Target acquired over 220 retail locations, with conversion to begin in 2013; 70% of Canadians recognize the Target brand and 10% have shopped it. After Target migrated its e-commerce site off its platform, the site suffered several general outages, most notably in September during a traffic spike prompted by its limited-edition Missoni apparel line.

Stock Valuation: Target is trading at a 15% discount its fair value of $65.43 so it is still a BUY. Target has a current dividend yield of 1.2% with a 12% CAGR. This CAGR results in a future yield on cost of 6.6% in 10 years.

3. Home Depot (NYSE:HD) - Home Depot commands the largest piece of the highly fragmented home improvement pie. The brand continues to expand as the market dictates, and with its deep pockets has invested heavily in in-store technology so associates can better service shoppers and manage inventory. Home Depot serves two audiences, delivering a how-to experience to consumers, and speed and efficiency to contractors. With e-commerce/in-store integration, the brand is at parity with most brick and mortar retailers. Its print and digital media feel more refined than the store - a common issue in the DIY category. Home Depot's track record of responding well to market challenges will be tested in some Midwest markets with the entrance of another aggressive competitor, Menards.

Stock Valuation: Home Depot is trading at a 9.9% discount its fair value of $51.68 so it is a HOLD. Home Depot has a current dividend yield of 2.5% with a future yield on cost of 7.7% in 10 years.

4. CVS Caremark (NYSE:CVS) - CVS operates in three general areas: Retail pharmacy, pharmacy benefit management (PBM) and retail clinic service. Its MinuteClinic division, with approximately 600 clinics in 26 states, stands to assert CVS' leadership position with hundreds of planned new locations to meet rising need. Thanks to the high utility of its mobile application, CVS estimates up to 2% of patient interactions are now through mobile devices. Its urban retail format focuses on consumables to better position CVS against the competition and the impending market saturation of retail pharmacies. Lucrative new PBM contracts stand to boost CVS' 2012 sales by an estimated $4.8 billion. However, at times inconsistent but reactive prioritization of business activities based on divisional performance clouds the brand's long-term goals.

Stock Valuation: CVS is trading at a 7% discount to its fair value of $48.66, so it is a HOLD. CVS has a current dividend yield of 1.4% with a future yield on cost of 8.9% in 10 years.

5. Best Buy (NYSE:BBY) - Although Best Buy dropped in overall brand value this year due to the soft consumer electronics market, it remains top-of-mind by 65% over competitors and claims more than 20% of the market share. Amid weak sales and growing online competition, the big-box giant is shrinking its 45,000 s.f. stores to 36,000 s.f. through retail sublets. Online, Best Buy plans to double its business over the next three to five years. The company's buyout of its U.K. partner, Carphone Warehouse, through the U.S. joint-venture Best Buy Mobile stores secures one of the fastest growing components of the brand's business fueled by the demand for smartphones. Prolific in retail innovations, Best Buy could gain ground again as consumers perceive digital tablets as a necessary purchase.

Stock Valuation: Best Buy is trading at a discount to its fair value but it carries a significant amount of risk based on meeting its future EPS growth. Based on the risk, this stock is a SELL until we see more operating results.

6. Walgreen (WAG) - Walgreen's focus on the customer is clearly apparent. The retailer slowed its expansion to a rate below 3% to allow for focus on creating a cohesive and relevant brand experience. Walgreen has made great strides in improving the consistency of its brand experience, offline and online. The Customer Centric Retailing program, implemented in over 6,000 of its more than 7,800 stores, has optimized its merchandising system and refreshed in-store communication hierarchy, boosting front-end productivity. Attributes of the recently acquired Duane Reade chain and its private label brands are being slowly introduced into the Walgreen network. In March, the company acquired, expanding its e-commerce reach by 3 million customers representing sales of over U.S. $456 million.

Stock Valuation: Walgreen is trading at a 17% discount to its fair value of $39.15 so it is a BUY. Walgreen has a current dividend yield of 2.7% with a future yield on cost of 7.0% in 10 years.

7. Coach (COH) - A consistently renowned American heritage brand of accessible and aspirational luxury with high positive social media scores, Coach has 500 stores in the U.S and Canada and enjoys an evergrowing presence globally, most recently entering Brazil and Vietnam. The company is experiencing tremendous growth in China due to the explosion of middle income families who aspire to higher-end brands. To protect its brand, Coach initiated a major crackdown on counterfeiters and trademark infringers. It also created a new brand, Reed Krakoff, to deliver a slightly different design aesthetic at a higher price point. All things related to the brand filter through Coach's executive creative officer to keep brand focus sharp. The result is continued double-digit growth.

Stock Valuation: Coach is trading at a 22% discount to its fair value of $93.00 so it is a BUY. Coach has a current dividend yield of 1.2% with a future yield on cost of 7.3% in 10 years.

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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.