It May Be Time to Take Retail Stocks Off the Racks
Robert Raiff, a star analyst at C. J. Lawrence, Morgan Grenfell in New York, is causing a stir with a new report on the retail business.
For nearly four years, clothing retailers have suffered through what Raiff calls “the worst bear market in over a decade.” Now, he says, it looks as though the business finally has hit bottom. Get ready for “the first dynamic operating environment in nearly a decade” for retailers, Raiff says.
To a lot of people, the clothing and general merchandise retail fields still appear to be in the throes of a major shakeout. Campeau Corp. is on the ropes, Ames Department Stores is sinking and Sears seems to be faltering anew. Their troubles are casting a general pall over the business.
To Raiff, the problems are old news. Instead, he suggests that it’s time to focus on the survivors and how they’re benefiting from the shakeout:
* Profit margins are rising for the strong players. That’s partly a result of tighter inventory controls, in the wake of the slowdown in consumer spending for clothing that began in 1987. More important, margins are growing as weak players fold and strong players pick up market share.
* The cost of expanding is falling. “Five years ago premium retailers were paying premium rents to ensure the best locations in the malls,” Raiff said. Today, with the glut of retail space, “the strongest retailers are getting special (lease) deals, while weaker players are forced to pay premiums.”
Those forces are going to make big winners of the strong players over the next few years, Raiff argues. His “strong” list includes such names as May Department Stores, J. C. Penney, Dayton Hudson and K mart. Raiff sees May’s earnings rising 18% in 1991 to $5 a share from an estimated $4.25 this year. Penney’s earnings should reach $7.70 in 1991, up 15% from an estimated $6.70 this year, he said. Other analysts may still be cautious, but Raiff said: “I’m buying the stocks now.”
In many ways, Raiff’s view is music to the ears of beleaguered stockbrokers. Retail stocks are tailor-made to be pitched to average investors.
For one thing, the business is relatively simple to understand, unlike, say, machine tools. Plus, an investor in a major retail chain can do his or her own research just by walking into any mall.
Many long-term investors who stuck with retail stocks from the start of the bull market, in 1982, have made a bundle. Most of the gains, however, came in the 1982-1987 period. In 1987 consumer spending began to slow, retailers suffered a fiasco in trying to push miniskirts on women who didn’t want them and the stock market crash deflated the alleged value of retailers’ assets.
Some retailers, especially those deep in debt, have never recovered from what 1987 brought. Even the best-managed firms have only recently seen their stocks inch back to their 1987 peaks.
For the long-term investor, the basic question now is: Can you make the kind of money in the top retailers in the ‘90s that you did in the ‘80s? Robert Urquhart, a partner at San Francisco-based RCM Capital Management, a $14-billion asset money manager, is dubious. “This is nowhere near as good an environment as the 1980s,” he said.
Purely from a demographic view--remember the aging Baby Boomers--job creation and growth in disposable income are unlikely to be as great in this decade as in the ‘80s, Urquhart said. High consumption is out; saving is in. That means a tougher environment for retailers.
He agrees that the survivors, such as May, Dayton Hudson and Wal-Mart, already are easily identifiable. But that doesn’t mean their stocks are going to rocket soon, said Urquhart, whose firm was a heavy seller of retail stocks late in 1989.
“We’re still in a period where the retail losers are dying a slow and painful death, and they’re inflicting pain on the survivors,” he said.
Still, Wall Street eventually loves all winners, and retail survivors clearly will be winners over the next few years, Raiff says. And rather than chase the stars of the ‘80s, such as Limited and Wal-Mart, Raiff’s favorite stocks such as May and Penney sport low price-to-earnings multiples--so you have “below-average risk (in) above-average participants in those glowing retail dynamics.”
Down and Out at Teledyne: The backdrop for Teledyne Corp.’s annual meeting today at the Beverly Hilton couldn’t be much worse. Monday, the company’s spinoff of its Unitrin insurance subsidiary became effective. Optimistic analysts had previously forecast that Unitrin might trade on its own for about $40 a share.
Instead, the stock began trading Monday at $33.75, and closed at $31.75. Tuesday, Unitrin fell 25 cents to $31.50. Meanwhile, stock in Teledyne--now almost purely a manufacturing and aerospace company--closed at $31.125 Monday, then plunged $2.50 to $28.625 Tuesday.
Investors clearly don’t think much of the manufacturing operations’ prospects. Weak first-quarter earnings didn’t help perceptions.
When Teledyne Chairman Henry Singleton and CEO George Roberts cooked up the idea of splitting Teledyne and Unitrin, their hope obviously was that the pieces would be worth more than the whole. That hasn’t been the case.
Which begs the question: Will Singleton/Roberts opt for some other bold move to raise shareholder value? Lawrence Harris, analyst at Bateman Eichler, Hill Richards in Los Angeles, notes, “Historically, when the stock has been depressed, Singleton has taken action.” A stock buyback or sale of some assets are possibilities, Harris said. Many of the big investors who still hold Teledyne say they’ll stick with it: Since Singleton, 73, controls 13% of the stock, it seems unlikely that he will allow the shares to languish for long. Said one hopeful East Coast money manager: “I know he (Singleton) doesn’t want to see a life’s worth of work go to $20 a share.”
THE RETAIL CHECKOUT
Can you make big money in retail stocks in the 1990s? For the most part, the stocks were dynamos in the 1980s. And many of the best performers since 1982 also are in the best shape to compete in the 1990s, analysts say.
1982 Tuesday Percent 1990 Stock high close change P-E* Gap $4 7/8 $63 3/8 +1,200% 18 Dillard Dept. 7 71 7/8 +927 15 Limited 4 1/8 39 7/8 +867 17 Wal-mart 6 7/8 48 1/4 +602 20 Nordstrom 6 3/8 28 7/8 +353 17 Woolworth 14 5/8 60 3/4 +315 11 May Dept. 16 1/2 49 1/4 +198 12 J.C. Penney 29 65 1/8 +125 10 Carter Hawley 17 3/8 6 1/8 +120** 12 Dayton Hudson 32 1/8 67 1/8 +109 11 Kmart 18 1/4 33 1/8 +82 8 Sears 32 35 3/8 +11 8 Ames Dept. 6 1/8 1 3/8 -78 -- S&P; 500 143.00 330.36 +131 14
* stock price-earnings ratio based on estimated 1990 earnings per share
** Carter Hawley percentage change calculated to include current value of Neiman Marcus stock, spun off to shareholders in 1987, plus $17-a-share cash dividend.
Source: Value Line Investment Survey; C. J. Lawrence
