NEW YORK (TheStreet) - Retail stocks such as Signet Jewlers (SIG), Big Lots (BIG), Rite Aid (RAD), Barnes & Noble (BKS) and Build-A-Bear (BBW) have outperformed the broader retail sector this year, as the S&P 500 Retailing Index has fallen 5.44% compared to a 6.1% gain the S&P 500 as of June 30.
In general, retailers - specifically those dependent on mall traffic - were crushed in the first half of the year as the harsh winter weather experienced by much of the U.S. kept consumers indoors and their wallets closed. Weather wasn't the only reason for poor performance -- it's clear that shoppers are being cautious, looking for deals, or for specific items, such as an Apple (AAPL) iPhone.
Companies that still rely on traditional bricks-and-mortar stores are struggling as they lose out to Amazon (AMZN) and other retail chains that have been quicker to embrace online sales channels.
Despite the general malaise for the first half of the year, there have been a few retail stocks that have outperformed. Four of the five retail stocks in TheStreet's list have embarked on a reboot strategy significantly in some way.
The second half is likely to be better for retailers, taking into account better employment data and the back-to-school season which will give a boost to retail chains from apparel makers to drug stores. That will be followed by the all-important holiday season.
"Retail stocks generally have a lower average return than the S&P 500 during the summer months between May and July because of a lack of catalysts (-0.8% on average)," Citigroup analyst Oliver Chen wrote in a June 25 note. "Performance will likely improve starting August and through November as back to school and holiday shopping boosts retail stocks."
TheStreet analyzed total return data as of June 30 from Bloomberg. The data parameters used included U.S. retailers whose stocks are in the Russell 3000. Here are five of the best performing retail stocks this year in ascending total return.
5. Signet Jewelers
Total Return (as of June 30): 41.04%
Price-to-earnings ratio: 24.24
Market Cap: $8.97 Billion
Signet Jewelers (SIG) has the mid-tier U.S. jewelry market wrapped up making it a viable force against Tiffany (TIF). The Hamilton, Bermuda-based company owns the popular Jared The Galleria of Jewelry and Kay Jewelers brands. Recently, Signet bought its competitor, Zales, for $1.46 billion, with the deal closing on May 29.
The combined company has more than $6 billion in annual sales, Signet said in May. Between its U.S. operations of Kay and Jared, the retailer owns 1,400 stores, a number that will rise to 3,000 in the U.S. and Canada between Zales and its kiosk brands, People's and Piercing Pagoda. The company also has about 500 stores in the U.K. under H.Samuel and Ernest Jones brands.
The Zales transaction is expected to be accretive to earnings in the first fiscal year by a "high-single-digit percentage," excluding any one-time costs associated with the acquisition, Signet said. Additionally the company expects roughly $100 million of "synergy potential" by the end of 2018, which includes $50 million of savings due to "improved product sourcing and purchasing leading to cost improvement;" $30 million of revenue benefit split between repair services and incremental margin from brand cross-selling; and $20 million of cost reductions in SG&A expenses, it said.
Sterne Agee analyst Ike Boruchow had Signet as his top stock pick, following meetings with Signet's management and rates the company at "buy."
Boruchow believes the company can obtain more than management's $100-million target in cost savings and additional revenue over three years. "While potential cost savings may be slow to develop (as SIG doesn't want to disrupt ZLC's current operations) several areas were not accounted for when the initial target was issued, specifically: savings on rent, headcount reductions/pairing field operations roles, DC consolidation,opportunities with the Vera Wang brand, and closure of the ZLC Texas headquarters," he wrote in a June 30 note to clients. "While that is not to say that all of the above will take place, it certainly illustrates where upside could originate."
Boruchow also expects the company to close approximately 200 under-performing Zales stores over the next four years, which would benefit earnings by 15-20 cents a share. "Once the closure program is complete, management will resume growing footage at the Zales brand, with off-mall locations providing the largest opportunity."
4. Big Lots
Total Return (as of June 30): 41.53%
Price-to-earnings ratio: 22.66
Market Cap: $2.55 billion
Big Lots (BIG) is one of many retailers attempting a turnaround. Under new CEO David Campisi, who came on board in May 2013, the company is looking to reinvigorate stores as it suffers from declining sales as it competes with Walmart (WMT), Target (TGT) and Dollar General (DG).
With roughly 1,500 stores across the U.S., Big Lots sells discounted merchandise, including "brand-name closeouts," seasonal products, food, furniture, housewares, toys and gifts, the company says on its Web site.
Though Big Lots has reported declining U.S. comparable store sales in eight of the past nine quarters, the company did have its first positive sales comp growth of 0.9% in the first quarter of 2014. Sales were roughly $5.1 billion for all of fiscal 2013.
"I've seen first-hand what our customer sees ... great value merchandise in many of our categories, which is very important in these difficult economic times," Campisi said in the company's annual letter to shareholders. "However, we also have seen challenges and inconsistency in our product offerings, a lack of a 'customer-first' mentality when merchandising our stores, and product assortments that had become too broad and less and less meaningful over time. We were trying to be everything to everyone which resulted in a business model that is overly complicated to operate and perform at a high level."
The company is exiting "weaker categories" such as hanging apparel, electronics, autos, and hardware under its "Edit to Amplify" strategy and allocating more space to food, pet, home and furniture, according to a March 19 note by Deutsche Bank analyst Paul Trussell, following meetings with management. Additionally, the company has upgraded its talent with roughly 18 executives being replaced over the past year and incentive plans have changed for store operations and management toward team ROI and operating profit goals and performance stock units, the note said.
"BIG remains one of our favorite long ideas as the turnaround story is still in the early innings," Trussell wrote. The analyst rates Big Lot shares "buy."
The company has also been in the process of winding down its Canadian operations, which it completed in February. Big Lots approved a $125 million share repurchase program in March.
The changes are "working to drive increased shopping frequency and higher average baskets," wrote Trussell in a May 30 note following first-quarter earnings. "Additionally, 2Q comp guidance of +1.0% to +3.0% showcases that trendshave accelerated recently. With BIG still in the early innings of its transformation, we continue to see significant upside potential from current levels."
3. Rite Aid
Total Return (as of June 30): 41.70%
Price-to-earnings ratio: 34.19
Market Cap: $6.94 billion
Drugstore chain Rite Aid (RAD) is another company looking to reinvent itself in a world where the Affordable Care Act is law, health care costs are rising and competition from CVS Caremark (CVS), Walgreens (WAG) and big retail chains like Walmart (WMT) intensifies.
The company is expanding is pharmacy offerings and remodeling stores to become "wellness providers" that would give customers more holistic, healthy living assistance. Rite Aid also secured an expanded pharmacy sourcing arrangement with McKesson (MCK) in February.
The Camp Hill, Pa.-based company acquired Boston-based Health Dialog Services, a provider of health coaching and healthcare analytics company, in April. It also acquired RediClinic, a Texas chain of about 30 clinics, in April.
"Retail clinics play a critical role in today's health care delivery system and will play an important role in Rite Aid's overall health and wellness strategy. We are committed to working with RediClinic to expand its current footprint in Texas and, in the near future, begin to bring its expertise in delivering convenient healthcare and wellness programs to Rite Aid customers in select Rite Aid markets," Rite Aid Chairman and CEO John Standley said in the press release discussing the RediClinic acquisition.
Earlier this year, as part of its fiscal 2015 guidance the company warned of "planned wage and benefit increases, the introduction of new generics in the second half of fiscal 2015, generic drug price increases and a challenging reimbursement rate environment" that would weigh on results, despite its turnaround efforts.
"Our recent acquisitions of Health Dialog and RediClinic, our expanded partnership with McKesson and our continued commitment to investing in our store base have positioned us to transition our strategy from turnaround to growth as we more aggressively pursue opportunities to become a growing retail healthcare company," Standley said in April during the company's fourth-quarter earnings.
Still the company posted first-quarter earnings results that were roughly half of the year-earlier period as Rite Aid grappled with "a reduction in pharmacy gross profit due to lower reimbursement rates that were not offset with reductions in generic [drug] costs," as well as higher salary and payroll related expenses." Quarterly revenue rose 2.7% to $6.5 billion primarily as a result of an increase in pharmacy same-store sales, it said in a June 19 release.
Rite Aid also lowered its adjusted earnings guidance for the fiscal year to a range of $1.275 billion to $1.35 billion from $1.325 billion and $1.4 billion, previously.
"We reiterate our [overweight] rating on RAD and believe recent weakness presents a buying opportunity as we believe the outlook remains intact," JPMorgan Chase analyst Lisa Gill wrote in a June 19 note.
2. Barnes and Noble
Total Return (as of June 30): 52.44%
Price-to-earnings ratio: NA
Market Cap: $1.34 billion
It should come as no surprise that Barnes & Noble (BKS) is struggling as it competes with Amazon. Its 660 retail stores have had mixed results, the Nook e-reader business remains unprofitable and even its college textbook division is having a hard time. The company has been closing retail stores and plans to close 20 more in fiscal 2015.
Revenue fell 6.7% to $6.38 billion for its fiscal year ending May 3, however adjusted EBITDA of $251 million - was the highest level in four years, according to CEO Michael Huseb's comments on its June 25 earnings call. Comparable sales in its retail stores declined 5.8% for the year, while comparable sales in its college business fell 2.7%. The company warned that for fiscal year 2015, it expects retail comp bookstore sales and college comps to decline in the low-single digits.
However, Barnes & Noble is giving a valiant effort to work through its troubles. The company made big news last week when it announced plans to spin off its Nook division, separating it from its retail stores. Shares surged more than 5% on June 25, the day of the announcement, which was in conjunction with its fourth-quarter and fiscal 2014 earnings results. That was on top of an announcement earlier in June telling of a partnership between Samsung Electronics and Nook to develop a co-branded Samsung Galaxy Tab 4 NOOK tablets that feature the Barnes & Noble digital reading experience. The 7-inch version is expected to be ready in early August.
"In fiscal 2014 we have taken certain actions to strengthen the company, including the ongoing rationalization of the NOOK business, growing the College business through new contract acquisitions and increased offerings to students and faculty, and initiatives to improve retail's sales trends," Huseb said on the call. "We believe we are now in a better position to begin in earnest those steps necessary to accomplish a separation of NOOK Media and Barnes & Noble Retail. We have determined that these businesses will have the best chance of optimizing shareholder value if they are capitalized and operated separately."
As well, the company remains excited about the prospects of its college business. Huseb sees a "strong pipeline" for new school contracts in fiscal 2015.
Stifel analyst David Schick who rates shares Barnes & Noble "hold," believes the company is taking the right steps to turn itself around. "We support the steps BKS is taking. Reducing costs of producing a tablet, partnering with a world class hardware brand to leverage high-margin content sales, closing stores, growing toys and games, innovating in digital education, and exploring structures to unlock shareholder value. All of this suggests management is now playing a poor hand quite well," Schick wrote.
Despite the optimis, Schick noted Barnes & Noble is not out of the woods just yet. "Financial effects of store closures will depend upon BKS driving strong recapture rates for reverse cannibalization (to nearby stores or online)," the analyst penned in the note. "Book sales remain weak but are in a slow, manageable decline. Management guidance for continued NOOK EBITDA losses next year means some investors will likely be disappointed in the amount of cost savings from the Samsung deal. NOOK cannot be fully valued in the market until investors believe in a path to positive cash flows before NOOK Media can be spun out."
1. Build-A-Bear Workshop
Total Return (as of June 30): 76.95%
Price-to-earnings ratio: 47.04
Market Cap: $239.6 million
Build-A-Bear Workshop (BBW) is a classic case of fickle consumers, in this case the hardest of those to please, children. The mall-based retail chain has suffered from losses the past few years, as its core consumer snubbed the customizable stuffed animals that were once all the rage. In June 2013, the company hired as its new chief executive, Sharon Price John, the former president of Stride Rite Children's Group (a division of Wolverine Worldwide (WWW)). Price John has held positions at Hasbro (HAS) and Mattel (MAT).
Since Price John's hiring, the company has been working its way back into its customers' good graces, and investors are taking notice.
"Investor interest in the company appears to be growing," Piper Jaffray analyst Stephanie Wissink wrote a June 10 note, following a management presentation at Piper Jaffray's annual consumer conference. Wissink established coverage on the stock six days earlier with an "overweight" rating.
Build-A-Bear has also embarked on a cost-saving strategy by closing stores, as it expects to close 22 stores this year, in addition to refreshing other stores. The company currently has about 400 stores in both the U.S. and internationally.
It's also changing its revenue mix to higher margin products, Wissink noted. One thing the company has going for it is that the brand is well known, and Build-A-Bear is looking to capitalize on that, further licensing the brand into other products. It has already done so in arts and crafts, videos and sleepwear. Those partnerships account for 20-30% of overall sales, Wissink wrote. Another area where the company is looking to grow is by opening international stores through franchising.
"The company reiterated its long-term profitability targets and is focused on a combination of sales drivers and rationalizing expenses to yield operating margin expansion," the note said. "We see a mid-single digit rate in the next 2-3 years, implying $0.75+ in EPS."
First-quarter adjusted income more than doubled to $5.4 million, or 31 cents a share. However revenue fell 6% to $98 million in the quarter. "With these results, we now have five consecutive quarters of operating improvement and we look forward to continuing our progress through the balance of the year," Price John said in the May 1 earnings release.
--Written by Laurie Kulikowski in New York.