Retail Comeback: Will These Retail Stocks Become Turnaround Stocks in 2014?

Mary-Lynn Cesar, Kapitall: J.C. Penney rose today after a Citi analyst upgraded the stock to buy. Are there more turnaround stocks to be found in retail?

J.C. Penney (JCP) shares rose 10% this morning following a rating upgrade from Citigroup (C) that increased the stock’s price target from $8.42 to $11. Citi analyst Oliver Chen explained the decision, highlighting the retailer’s gains in comparable same-store sales during the fourth quarter as proof that a recovery was taking hold.

[Read more from Kapitall: Would a Spotify IPO Rock the Music Industry?]

This is the second time in a week that J.C. Penney’s shares have jumped a significant amount in early morning trading. Last Tuesday, warm responses to the department store’s spring campaign TV spots and a credit rating upgrade sent shares up by 9%.  

Click on the interactive chart below to see sales data over time​.

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The positive sentiment is markedly different from how the markets perceived J.C. Penney back in January. Following an after-hours announcement that the retailer would close 33 stores and lay off 2000 employees, the stock price - already near a 52-week low – fell by 0.6% to $6.97.

Investing Ideas

We wanted to see if other sales-challenged stocks were primed for a turnaround in the near future. To begin, we constructed a universe comprised of stocks belonging to the following industries: department stores, electronics stores, and specialty retail, other.

We chose these industries because big name companies have been struggling in each one: JC Penney in department stores, RadioShack in electronics, and Staples in speciality retail. All three have announced store closings this year.

Next, we narrowed down that group by screening for stocks with  falling  gross profit margins year-over-year for the last three years. Gross margin is the percentage of profit a company makes for each dollar it generates in sales, after deducting production expenses. Examples of these expenses include operating costs, payroll, and taxes.

Gross Margin = Gross Profit / Revenue

The lower the percentage, the smaller the gross profits a company retains from its revenue. When a company has falling gross margins, it indicates that the firm is having difficulty controlling its costs.

We ran this screen because it allowed us to isolate the companies, like JC Penney, that may be hiding a burgeoning recovery amid lackluster sales. We were left with three stocks on our list.

The List

Click on the interactive chart to view data over time. 

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Do you think these are turnaround stocks? Use this list as a starting point for your own analysis.  

1. ZAGG Inc. ( ZAGG): Designs, manufactures, and distributes protective coverings, audio accessories, and power solutions for consumer electronic and hand-held devices, under the invisibleSHIELD, ZAGGaudio, and ZAGGskins brand names, primarily in the United States and Europe.

Market cap at $139.54M, most recent closing price at $4.45.

Gross profit margins decreased from 49.12% to 45.73% during the first time interval (12 months ending 2011-12-31 vs. 12 months ending 2010-12-31). For the second time interval, gross margins decreased from 45.73% to 45.59% (12 months ending 2012-12-31 vs. 12 months ending 2011-12-31). And for the final time interval, gross margins decreased from 45.59% to 39.72% (12 months ending 2013-12-31 vs. 12 months ending 2012-12-31).

Sales of Zagg’s invisibleSHIELD screen protectors accounted for 42% of net sales in 2013 compared to representing 46% of net sales in 2012. iFrogz Audio sales remained flat at 16% of net sales. Meanwhile, keyboard sales rose from 24% of net sales in 2012 to 29% in 2013.

CFO Brandon O’Brien said that as of this quarter (Q1 2014) Zagg no longer had any debt on its balance sheet. O’Brien also stated that the company successfully reduced its debt by almost 40%, lowering it from $28.6 million to $17.5 million.

Zagg expects new product launches to help the company reach its annual net sales target of 1-4% growth for the year. invisibleSHIELD On Demand, introduced at CES, is expected to drive the growth. The program lets retailers instantly create screen protectors for nearly any device, allowing them to offer invisibleSHIELDs the same day a new product launches. It is scheduled to debut early this year.

CEO Randall Hales told earnings call participants that Zagg expects invisibleSHIELD sales to stabilize in the second half of the year and to resume growth in 2015 thanks to invisibleSHIELD On Demand. Hales said. “The advantage of the invisibleSHIELD On Demand program is its ability to quickly produce screen protection for virtually any device thus capturing the estimated 20% to 30% of customers that are currently turned away due to retailers and kiosks not carrying a package screen protector for their device."

 

2. RadioShack Corp. ( RSH): Engages in the retail sale of consumer electronic goods and services through its RadioShack store chain and kiosk operations.

Market cap at $217.15M, most recent closing price at $2.15.

Gross profit margins decreased from 45.98% to 44.86% during the first time interval (12 months ending 2010-12-31 vs. 12 months ending 2009-12-31). For the second time interval, gross margins decreased from 44.86% to 41.36% (12 months ending 2011-12-31 vs. 12 months ending 2010-12-31). And for the final time interval, gross margins decreased from 41.36% to 36.68% (12 months ending 2012-12-31 vs. 12 months ending 2011-12-31).

After the high of having one of the most popular ads of the Super Bowl, RadioShack plummeted to an all-time low last week when it announced that it plans to close 1100 stores. The news came with the release of RadioShack’s fourth quarter earnings, which showed a 20% drop in revenue to $935.4 million from last year’s $1.17 billion.

During the quarter, RadioShack reported a loss of $191.4 million. The company’s net loss for the entire year was a whopping $400.2 million, more than double its $139.4 million loss in 2012. Debt fell from $778 million in 2012 to $614 million at the end of 2013. Bloomberg reports that RadioShack’s plummeting revenue is essentially seen as a default by credit investors and that the company’s credit-default swap and bond prices merits a C level rating.

At the end of 2013, RadioShack had $180 million in cash and cash equivalents and $375 million in a new credit facility for a combined total of $554 million in liquidity. CFO John Feray said the amount is enough for the company to meet its obligations and carry out planned operations for the remainder of the year. While investors wonder if RadioShack will survive the year, Quartz suggests that Amazon (AMZN), which certainly played a role in the company’s demise, should just acquire  it.

 

3. Best Buy Co. Inc. ( BBY): Operates as a retailer of consumer electronics, home office products, entertainment products, appliances, and related services primarily in the United States, Europe, Canada, and China.

Market cap at $8.93B, most recent closing price at $25.62.

Gross profit margins decreased from 25.23% to 24.83% during the first time interval (53 weeks ending 2012-03-03 vs. 52 weeks ending 2011-02-26). For the second time interval, gross margins decreased from 24.83% to 23.62% (48 weeks ending 2013-02-02 vs. 53 weeks ending 2012-03-03). And for the final time interval, gross margins decreased from 23.62% to 22.85% (52 weeks ending 2014-02-01 vs. 48 weeks ending 2013-02-02).

Best Buy generated $14.47 billion in revenue in its fourth quarter, reflecting a 3% decrease from the $14.92 billion reported the year prior. Comparable same store sales also fell, dropping 1.2%, while domestic comparable online sales increased by 25.8%.

The jump in online sales is part of CEO Hubert Joly’s “Renew Blue” re-structuring strategy, which aims to turn the company around through increased online sales and cost-cutting measures. Joly spoke about Renew Blue during the latest earnings call, praising the company for beating the cost reduction target of $725 million by $40 million.

Joly also touted Best Buy’s expanding customer service options as important features of the company’s growth. Best Buy’s offerings include ship-from-store at over 1400 stores; 2000 Samsung and Windows stores inside Best Buy locations; and relaunched loyalty and credit card programs. The company has also increased its Net Promoter score by 300 points, which indicates that customer loyalty to Best Buy is increasing.  

(List compiled by Mary-Lynn Cesar, a Kapitall Writer. Average analyst ratings and quarterly sales data sourced from Zacks Investment Research. Gross margin data sourced from Google Finance. All other data sourced from Finviz.)

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