Hope Springs Eternal With Department Stores
With a remarkable consistency that’s beginning to match the swallows’ record at Capistrano, investors this spring are once again bidding up shares of the big department store stocks.
It’s happened for five straight years now. But if past is prologue, many of the stocks will turn into lumps of coal by the time the holiday shopping season arrives. That’s because investors’ expectations of continuing strong retail sales, and their ardor for the stocks, are typically dashed as the year rolls on.
“We usually see the retailers outperform the market significantly in the first quarter, and thereafter usually fade,” said Thomas Tashjian, a retail analyst at NationsBanc Montgomery Securities in San Francisco. “They generally underperform in the remaining three quarters of the year.”
Thus far in 1998 the stocks are indeed outpacing the broader market, helped by healthy consumer spending. Standard & Poor’s index of general retailers has spurted 30% so far this year, more than double the 14% gain of the blue-chip S&P; 500 index.
Individual stocks handily beating the market include Sears, Roebuck & Co. (ticker symbol: S), Wal-Mart Stores Inc. (WMT) and Dayton Hudson Corp. (DH), which owns the Mervyn’s and Target chains. Even J.C. Penney (JCP), which is undergoing yet another restructuring, is well ahead of the general market.
The stocks got an added boost last week when most reported March “same-store” sales that, although only moderately better than a year earlier, did not disappoint Wall Street, either. Those sales reflect sales at stores open at least a year and are considered the bellwether indicator of a retailer’s fortunes.
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While it’s true that one could have made a handsome profit in recent years just buying the stocks in January each year and selling them in April or May, for those with longer investment horizons Wall Street’s stock pickers believe there are certain stocks that can break out of the sector’s recent pattern.
(For purposes of this discussion, we’ll use the “department store” tag to include a few big chains that some refer to as “discount” chains, such as Kmart Corp. [KM] and Wal-Mart.)
Kmart, in fact, is one of the retailers that’s high on the list of Bruce Missett, retail analyst at Morgan Stanley, Dean Witter & Co. He has a “strong buy” on the stock, in good part because he sees Kmart’s sales of women’s apparel--a major factor in the chain’s performance--rebounding from last year.
Kmart stumbled badly in the mid-1990s, but now its program of overhauling many stores into updated “Big K” outlets is paying off. Kmart also has exclusive brands that are fueling growth, including Martha Stewart household items, Sesame Street children’s apparel and Penske automotive supplies, Missett said.
While Kmart shares are priced at about 20 times analysts’ consensus estimate for 1998 earnings per share, Lehman Bros. analyst Jeffrey Feiner says the stock is trading at just 14 times his estimate of 1999 earnings per share. Given that valuation, Kmart “offers an attractive risk-reward ratio at these levels,” Feiner said.
Missett also has a “strong buy” on Sears. The Chicago-based giant also trades at a relatively low multiple of about 14 times 1999 earnings (and 16 times analysts’ 1998 estimate), and credit card delinquencies that have been eating into Sears’ profits are showing signs of easing, he noted.
Sears posted a 4.7% March gain in same-store sales, which topped the 3.4% average gain of the 42 retailers surveyed each month by Goldman, Sachs & Co.
But not everyone is so bullish on Sears, which also owns the Orchard Supply Hardware chain. Tashjian has a “hold” on Sears, in part because the retailer will need “more aggressive and costly advertising and promotions” to keep sales growing--programs that will nick earnings.
Another chain that sported strong March sales (up 7.3%) was May Department Stores Co. (MAY), which owns Robinsons-May. Although he has a “hold” on that stock as well, Tashjian said May has a solid balance sheet that the company might use to make an acquisition or buy back shares. Both could help May “grow earnings per share and its share price,” he said.
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As for Wal-Mart, its stock has been surging for more than a year, yet it’s still a “buy” according to Feiner and Salomon Smith Barney analyst Richard Church. They’re cheered by Wal-Mart’s sales growth and by its increased attention to boosting shareholder returns.
Wal-Mart also is starting to reap the benefits of its international expansion, and it has more than $1 billion in cash on its balance sheet, which could be used for acquisitions, another dividend hike or stock buybacks, analysts noted.
Several analysts rank Penney a “buy,” meanwhile, amid new plans by management to widen the chain’s profit margins, reduce costs and get merchandise--especially hot-selling apparel--to its stores much faster. Feiner also noted that Penney sells at a “conservatively valued” 16 times his forecast of Penney’s 1999 earnings per share.
But if investors are wary about Penney’s prospects, they have reason. The chain has changed its strategy several times over the years in its struggle to improve, leaving many investors--not to mention shoppers--confused. Among other things, it got rid of many hardgoods items such as toys and televisions, then it moved upscale with more fashionable and expensive apparel.
To many observers, though, Penney is now in a risky middle ground between the popular discount chains such as Wal-Mart, and higher-end specialty retailers such as Saks Holdings Inc. (SKS) and Neiman Marcus Group Inc. (NMG).
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There’s another department store chain that might not be widely familiar to investors, but it has lots of fans on Wall Street: Alcoa, Tenn.-based Proffitt’s Inc. (PFT).
Proffitt’s operates in 24 states (though not in California) and has grown rapidly through acquisitions, including the purchase of Carson Pirie Scott earlier this year. Its stock has nearly doubled in price over the last 12 months, to $36.25 a share now, yet no fewer than seven Wall Street analysts have “buy” ratings on the shares.
Why? The company is still somewhat of a sleeper. According to Feiner, who just upgraded Proffitt’s to a “buy,” the stock trades at a discount to its peers by several measures, and it is “being valued as a slow-growth department store operator” even though the company’s projected earnings growth “is nearly twice the growth rate of other department store retailers, on average.”
Proffitt’s stock currently trades at about 20 times estimated 1998 earnings per share.
Incidentally, several of the department store chains have direct-investment programs, whereby investors can purchase their stocks without using a broker. They include Sears, Wal-Mart, Dayton Hudson and J.C. Penney, according to Netstock Direct (https://www.netstockdirect.com), an online database.
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Shop Stocks
Shares of major department stores are outpacing the market so far in 1998, but analysts worry that the stocks will languish as the year goes on. That’s been the sector’s pattern for the last five years. Some of the key players:
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Ticker Monday Pct. change Stock symbol close from 12/31 P/E* Kmart KM $18.00 + 57% 20 Wal-Mart Stores WMT 51.19 + 30 29 Dayton Hudson DH 85.13 + 26 23 Sears Roebuck S 55.75 + 23 16 J.C. Penney JCP 73.94 + 23 19 May Department Stores MAY 64.06 + 22 19 Federated Dept. Stores FD 50.75 + 18 17 S&P; 500 index + 14 23
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*Stock price-to-earnings multiple based on analysts’ consensus estimates of 1998 per-share earnings
Source: Bloomberg News
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Times staff writer James F. Peltz can be reached at james.peltz@latimes.com
