"Retailers are one of the few sectors that appear to be pricing in the
fear of a recession."
–Bill Nygren, manager of the Oakmark Fund
Are the Retail stocks bargains?
That’s the question Jacqueline Doherty asks on this week’s Barron’s.
Given the recent Retail sales data, that question is especially relevant. Add to it the under-performance of the sector (see nearby chart) and you have the makings of either a great buy — or a value trap.
As we noted earlier this week, October Retail sales were disappointing with what little gains there were mostly attributed to Food Inflation. It was no surprise to learn that Consumer Sentiment had dropped to a 2 year low.
However, that’s become well known. In theory, this should be already reflected in the stock price:
"A NUMBER OF VALUATION METRICS are signaling that retail shares are attractive. Multi-line retailers in the S&P 1500 sport P/Es based on future earnings that are 0.9 times the broader index’s, notes Brian Rauscher, director of portfolio strategy at Brown Brothers Harriman. After the dot-com bubble burst in 2000, retailers sold off until their multiples were 0.7 times that of the broader index. Typically, they have peaked when multiples reach 1.2 times that of the S&P 1500 . . .
[Bill Nygren] believes that the shares are more attractive than other stocks, including many in the materials and technology sectors, whose still-lofty prices reflect little risk that the economy will stop growing. Retail stocks would outperform in a recession, he maintains, and could rally strongly if the economy keeps growing."
To adequately answer the question, we have to look at several variables, and correctly assess how they will develop over the next few quarters. Then we have to guesstimate how much of these elements are already
fully reflected in stock prices:
1) Will energy prices stay high, or will there be any relief in 2008?
2) How much of the weak sales is legitimately attributable to warm weather?
3) Is hiring likely to improve? Will incomes and wages increase over the near term?
4) If not, will Consumers have access to ready lines of credit to fuel further spending?
5) Will the economy dramatically slow? Will we slip into a mild recession — or something worse?
and the money question:
6) Will Retail stores be able to maintain their pricing margins AND their sales volumes? Are deep discounts likely this holiday season?
Barron’s adds this ominous notes: "Wal-Mart began offering bargain buys three weeks earlier than it has in the past, and Best Buy isn’t far behind, having announced plans to lure its best shoppers with weekend specials."
Many of the stocks in this space have been hit — but not brutally so. Macy’s (M) is own 22%, Nordstrom’s (JWN) off -34%, Saks (SKS) down 12%.
Costco Wholesale (COST) is down -26%; Coach (COH) is down 25%.
Yet much of the sector seems to be holding up okay: Costco Wholesale (COST) is up 26%; Target (TGT) is practically flat, off just 3%. For all my whining about energy prices, Wal-Mart (WMT) has fallen a mere -6%. And Best Buy (BBY), whose fortunes appeared tied to Housing, is also down just -6% ytd.
This is only a guess on my part, but it does looks a bit early to be making a contrary bet on Retailers — especially if Food and Energy prices stay high, or the rest of the economy continues to cool.
chart and table courtesy of Barrons
Combing Through the Bargain Bin
Barron’s, Novermber 12, 2007