The Best Retail Names

As Toby outlined the Q2 mastermind there is a very crowded trade in the works....AMZN vs every retail company. Mr. Market doesn’t know what to do with uncertainty and tends to extrapolate one year’s earnings (or one quarters earnings) into the future indefinitely. There is no doubt that there has been pressure on top line revenue and margins for most retail companies. I am sitting on the other side of the amazon trade saying "it’s not THAT bad".

What are the best names? I love to find whole cigars looking for cigar butts. Earlier this spring I had invested in KORS as it was cheap on the screeners and they were planning on buying back stock with excess cash flows. It has worked out great, although recently management haven’t been able to resist acquisition madness and are destroying value by overpaying. Why on earth would you pay 60x earnings for another company when your own company was less than 8x....this is beyond me. I wouldn’t recommend them anymore as they are seeking to become a Luxury Brand, and will likely overpay for more and more brands. The synergy of strong cash flows and buybacks (only if cheap) is simple and great for EPS.

FL looks good to me. I believe they will have some degree of resistance towards online retail....shoes and sportswear are some of those things you kind of have to try on and walk around in....maybe I am wrong. Cheap and cash flows point to some easy 15+%.

LB are another name that has some resilience imo. The need for a woman to feel sexy is a powerful and underrated moat. Again I think that product is one that is more likely to be purchased in person than online. They are a fairly popular brand, curious to see how cheap they will get. I find the more popular and wider the moat the higher they trade at like a LULU. Cash flows are quite good, and hopefully their historical ROIC can apply to their recent CAPEX.

TGT as outlined in @PrestonPysh article https://www.forbes.com/sites/prestonpysh/2017/08/19/targets-intrinsic-value/#6a9772777da7 I would also recommend. Typically I invest in low earnings multiple because it results in strong cash flows. TGT has those cash flows with an average earnings ratio. Best part of those strong cash flows is the share cannibalism! I consider TGT management actually quite good, they can get cash flows year in and year out. Selling their pharmacy to CVS and some space to Starbucks has been great. You have to get past their huge mistake trying to move into Canada though.

BBBY is cheap. I don’t particularly consider them wide moat. Their top line revenue hasn’t fallen yet, although their margins are under siege. Even if you price in margins further contracting, I have no doubt some 15+% is available....perhaps closer to 20+%.

http://acquirersmultiple.com/ Is full of retail names. Curious to see other TIPers view.

Best Regards,
Colby

Comments

  • edited August 31
    Here are the retail stocks i currently own. Most I bought in the last week:
    BBBY,FL,GCO,FRAN,FOSL,HIBB.

    After being mostly in cash,i really bought pretty heavily.

    My favourite?

    HIBB!!!!!!!

    I will also write an article in my blog about retail next week. Finally there is something interesting to invest:-)
  • One more comment:
    1) TGT looks not attractive to me at current prices (compared to other retail stocks). If it drops another 60-70%,i will have another look
    2)LB has a messed up balance sheet.also not attractive.

  • @christoph Your correct about LB! Its got a pretty nasty balance sheet, those sexy vixens on the investor relations page are quite distracting! Bad balance sheet instant disqualification for me, that was a hard lesson to learn.

    I'll have to look more closely at HIBB! Numbers look good at a glance....I hear kids sports teams use them exclusively for uniforms....although I have yet to go into one.
  • Hello @christoph

    What made you take a position in FOSL? I would like to know your thought process in your decision. It looks like the whole smartwatch trend is killing their traditional watch business.
Sign In or Register to comment.