Federated Discount Not Large Enough

If you're like many people with schoolkids, you may have spent part of this past weekend combing department stores and discount retailers for back-to-school deals.

At least that's what companies like Federated Department Stores (FD Quote) are banking on. Back-to-school is the second most important shopping season behind the year-end holidays. Even so, that doesn't necessarily mean that now is the right time to load up on the stock.

Sure, Federated is one of the best-managed department-store retailers out there. Its shares have become cheaper, too. They have lost more than 10% of their value since I last highlighted the company on June 16, when I advised against buying the stock. Shares are now down nearly 6% for the year, underperforming the 3.5% decline in the S&P 500.

Retailers in general, though, and Federated in particular, face some pretty big challenges ahead. Tougher comparisons against a successful retail environment last year is one of them. And while a strong balance sheet, good cash flow and sizable repurchase plan may provide support for the stock, its current valuation is still not that compelling, given the outlook. Federated trades at a P/E ratio of 11.7 times this year's consensus earnings-per-share estimate of $3.80, slightly below its long-term average of 12.5.

A slew of economic statistics reported recently haven't helped the uncertainty. Last Thursday, retail sales (excluding autos) rose 0.7% for July. While that was a big improvement from the 0.5% decline reported for June, it was nowhere near Wall Street's expectation of a 1.1% increase.

This came on the heels of July's disappointing jobs report, where just 32,000 new jobs were created. Between the uninspiring jobs picture and higher oil prices (gasoline prices in many places are up more than 20% year over year), it's no surprise that an early read on early August consumer confidence from the University of Michigan showed a decline to 94 from 96.7 in July.

But there's more to be concerned about. Although personal disposable income is still rising and should improve if the jobs picture brightens, the fiscal and monetary stimulus that boosted consumer spending last year is largely absent in the second half of this year. Higher interest rates have already slowed the torrid pace of mortgage refinancings, and there's no tax relief this year to help either. It was in the third quarter of last year that many households began receiving their $400-per-child tax credit checks.