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Stock Screen: Retail Stocks with Solid Earnings Growth Prospects and Relative Safety - January 9, 2013
The world of retail is a finicky one where consumers’ perception of merchandise assortments can make or break a retailer’s numbers in any given year. Consumer tastes are always changing, making it difficult for corporate buyers to anticipate which fashions will captivate shoppers. That’s because purchase orders for goods are made months before the products hit store shelves. Some buyers are simply better than others at identifying merchandise people will want. The same holds true for specialty retailers that design and manufacture their own merchandise.
Although investors aren’t normally privy to precise details about upcoming collections, most management teams are forthcoming with their general merchandise strategies, particularly those that work for retailers that have fallen out of favor with consumers. In this turbulent economy, many retailers have been adopting strategies focused on value propositions. For most Americans, the days of splurging at the mall are long gone. Now, a “new normal” has emerged, in which the masses look for quality brand name merchandise at affordable prices.
Oftentimes, even desirable merchandise and a solid strategy aren’t enough to overcome a challenging environment. Astute retail investors consider the buying power of a retailer’s clientele. Further, a range of macroeconomic factors, such as home prices, the unemployment rate, the savings rate, wage increases, indebtedness, and recent stock market performance, can dictate where and when people choose to spend their hard-earned disposable income. Also, if a retailer's store count is concentrated in a specific region, investors should consider the economic state of that region when conducting analysis.
We have chosen to focus on companies in the Retail Soft Lines, Retail Hard Lines, and Retail Store Industries with Safety and Timeliness ranks of 3 (Average) or higher. We included only those companies with above-average return on shareholders’ equity in the past year, 3- 5-year projected earnings per share growth, and Price Stability scores. The result was six companies (see below), two of which we have selected to highlight: Hibbett Sports, Inc. (HIBB) and PetSmart, Inc. (PETM).
Hibbett Sports, Inc.
Hibbett operates sporting goods stores in 26 states throughout the Southeast, Southwest, Mid-Atlantic and Midwest regions. Its market niche is middle to lower income populations that range from 25,000 to 75,000. As of October 27, 2012, it had a total of 848 retail outlets, approximately 77% of which were located in strip centers, with the rest found in enclosed malls. Most locations are 5,000 square feet in size (around that of old Blockbuster Video stores). Hibbett has long pursued a strategy of opening stores close to Wal-Mart (WMT - Free Wal-Mart Stock Report) supercenters in order to take advantage of traffic generated by those outlets, as well as their lack of premium sporting goods. For Fiscal 2011, the most popular product category was athletic footwear, followed by performance and fashion apparel and team sports equipment.
In the fiscal third quarter, Hibbett’s earnings per share grew 21% year over year, and overall sales rose 9.6%. Same-store sales (includes only those stores open for more than one year) increased 6.4%, marking the 12th consecutive quarter of positive comps.
We have little reason to believe sales slowed during the holiday season. The rare snow storm that hit many southern states around the Christmas holiday most likely spurred sales of North Face fleece jackets. On the other hand, rival Dick’s Sporting Goods (DKS), has probably experienced some inflated discounting on winter gear due to relatively warm weather conditions in its largest market, the historically cold Northeastern region, an area where Hibbett has minimal presence. The 2013 BCS National Championship football game likely spurred sales of Alabama University merchandise, the victor of that contest.
In 2013, Hibbett expects to ramp up its store expansion efforts compared to 2012. The company is hiring more real estate personnel and plans on opening a new distribution center within the next 18 months. This ought to help the company reach its goal of doubling its store base over the next five years and lead to solid long-term earnings per share growth.
PetSmart is the leading specialty provider of products, services, and solutions for the health, care, growth, and containment of pets in the United States, based on net sales. Its primary strategy is to provide “total lifetime care” of its customers’ pets by “enhancing the emotional connection pet parents make with their pets and with PetSmart.” Therefore, management compensation is largely determined by customer satisfaction. Its locations range in size from 12,000 to 27,500 square feet and offer approximately 10,000 distinct items, including national and proprietary brands. The services PetSmart offers include grooming, training, boarding, and day camp. The company’s partner, Medical Management International, Inc., operates full-service veterinary hospitals in approximately 65% of its stores under the trade name of “Banfield, The Pet Hospital.” Its PetPerks program enhances knowledge of the customer base and permits targeted advertising.
PetSmart reported another quarter of solid earnings growth on November 14, 2012, marking the ninth quarter out of the past 11 where the company beat estimates and raised guidance. Earnings per share were up 50% year over year, while comparable-store sales grew 6.5%, as the number of transactions was up 2.3%. Strength was exhibited across all three merchandising categories; consumables, hard goods, and live goods, as well as in its services business. In response, PetSmart raised the midpoint of its 2012 earnings per share guidance range by 4%.
We think PetSmart will continue enjoying success in the New Year. In consumables, it has added innovative new dog and cat food offerings and expanded its grain-free and limited ingredient assortments. In the past year, there has also been a “reset” in dog toys and other hardware. These innovative new products ought to continue driving sales. PetSmart has also expanded its assortment of exclusive and proprietary brands. Further, we think the recent strength in the housing market will spur greater demand for pets in general and the products and services that go along with their care. Also, a mix shift toward more lucrative services ought to continue boosting profitability.
Looking long term, the company should benefit from the continuing pet craze. The American Pet Products Association, or “APPA,” estimated that the market for pet products rose nearly 200% from 1994 to 2011, and will reach $53 billion in 2012, reflecting 5.3% growth year over year. It attributes part of the increase to baby boomers with empty nest syndrome (loneliness caused by offspring leaving home), as well as young professionals putting off having children in favor of focusing on their careers. Indeed, it appears more people are looking to pamper their pets and treat them as part of the family. We think the stock will prove more reliable than other retail outfits in this uncertain consumer spending environment.
Company Name Ticker
|rue 21, Inc.||RUE|
|Ross Stores, Inc.||ROST|
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.