These Beaten-Down Retail Stocks Are a Bargain Ahead of Black Friday
Bloomberg News
Don't count out the retail sector, which has slumped in recent days amid fears of a shopping slowdown this holiday season. The indicators suggest otherwise, which is an opportunity for value investors willing to look deeper.
Let's start with the ostensibly weak operating results released by Macy's (M) - Get Report on Wednesday, which have been greatly exaggerated by overly pessimistic investors. Many investors took Macy's results as a red flag for the retailing sector; we beg to differ.
In its fiscal third-quarter earnings report, Macy's said adjusted earnings per share were 56 cents, down from 61 cents in the year-earlier quarter. For fiscal 2015, Macy's management now expects EPS in the range of $4.20-$4.30, down from the previous projection of $4.70-$4.80. For the fourth quarter, the company expects EPS to range between $2.54 and $2.64.
Macy's also lowered its sales outlook for fiscal 2015, with total sales expected to drop between 2.7% and 3.1%, a reduction from its previous guidance for a 1% decline.
The news sent the retail sector into a tailspin, as investors took Macy's operating results as a sign that the impending shopping season will be a dud. By the market's close on Wednesday, a slew of major retail stocks had sharply declined: Kohl's (KSS) - Get Report fell 5.4%; Nordstrom (JWN) - Get Report 3.7%; Urban Outfitters (URBN) - Get Report 7.4%; PVH (the company that sells such brands as Calvin Klein, Tommy Hilfiger, Van Heusen, Izod, Arrow, and Speedo) 5%; and Sears Holdings 2.56%. The SPDR S&P Retail ETF is now down 7.4% year to date.
Forgotten amid the excessive negativity: Macy's still managed to beat Wall Street's EPS consensus by a couple of cents, despite vigorous competition from the likes of Walmart and Amazon.
Unlike flagging competitors such as Sears, Macy's has done many things right. The storied department store chain has retained its upmarket cachet by limiting deep discounting, enhanced its e-commerce offerings and put in place cost-cutting that has lifted profit margins to a healthy 9.72%.
Beyond Macy's still sanguine attributes are indicators that point to a resurgence in consumer spending. With three weeks to go before the annual frenzy known as Black Friday, the stars seem to be in alignment for healthy spending.
Strong employment growth, low gasoline prices, rising home prices and reduced household debt have buoyed consumer spending throughout the year, more than counterbalancing global uncertainty. And despite robust demand from shoppers, inflation has been kept in check by low energy prices and a strong dollar that makes imports less expensive for U.S. consumers. Not all stocks will benefit from these positive trends; in fact many stocks in other sectors face unstoppable decline. But retail stocks right now appear to be oversold.
Not surprisingly, consumer sentiment rose in October and analysts with the University of Michigan's consumer sentiment index predict another increase in its first estimate for November. Surging motor vehicle demand is another sign that consumers are far from being in a stingy mood this season.
The verdict: The investment herd is overreacting to Macy's third-quarter earnings release, seeing it as a harbinger of doom for a sector that has a lot going for it. Many of the stocks that took a beating in the wake of Macy's earnings announcement are now undervalued in light of growth prospects.
Consumer spending accounts for about two-thirds of U.S. gross domestic product, so keep these positive consumer-related indicators in mind when weighing the future direction of the overall economy and markets. Also remember that about two-thirds of consumer spending occurs between now and the end of the year. The official kick-off, of course, is the frenetic Friday after Thanksgiving.
If you're looking for a specific retail stock play that's inexpensive, consider the recently maligned Macy's, which now trades at a trailing-12-month price-to-earnings ratio of 10, compared with 18 for its department store peers. Even with management's reduced guidance, that makes Macy's a good bet now on a still-vibrant consumer.
Another good value play now in retailing is beaten-down designer brand company Michael KorsHoldings (KORS) , which is down nearly 45% year to date. The company has successfully repositioned itself as an affordable luxury brand, while also establishing an effective online footprint, giving it a solid foundation in coming quarters. The company recently reported healthy second-quarter earnings and revenue, which bode well for the future.
Many stocks, though, aren't as promising. Certain sectors face a litany of woes that will batter the weakest stocks. For a complete report on the absolute worst stocks to own right now, click here.
John Persinos is editorial manager and investment analyst at Investing Daily. At the time of publication, the author held no positions in the stocks mentioned.