A “steadily improving” economy and 4.8 percent unemployment rate are benefiting retailers with a strong online presence — and
leaving those who depend on brick-and-mortar sales out in the cold.
That’s the message from Susquehanna, which started a range of retailers Friday. Analyst Bill Dreher gave a positive rating to
nameplates such as Costco Wholesale Corporation (NASDAQ: COST) — which Susquehanna said is one of the sector’s few
international growth stories, and an “Amazon-resistant” one at that — and a negative to retailers such as Sears Holding
Corporation (NYSE: SHLD), which Dreher said has seen
falling revenue and a net loss every year since its 2006 marriage with Kmart.
Retailers that depend on department store sales will continue to struggle with right-sizing and face a 2017 holiday season with
“bleak” results, Dreher said.
“The only sectors insulated from this online takeover are those who ship materials difficult to deliver over the internet, such
as off-price merchandise [TJX Companies Inc (NYSE: TJX)'s T.J. Maxx and Ross Stores, Inc. (NASDAQ: ROST)], or deep value & consumable products [Wal-Mart Stores
Inc (NYSE: WMT) and Costco].”
Retail Roundup
Here’s a look at Susquehanna’s analysis of individual retailers:
Big Lots, Inc. (NYSE: BIG) initiated at Neutral with a $55 price target.
- Big Lots is America’s largest closeout retailer, with 1,442 stores in 47 states, according to Susquehanna. Big Lots stores
rely on a mix of essentials and select higher-margin products, and the company is perfecting its locations, Dreher said. The
retailer’s risk/reward profile is balanced, Dreher said.
Costco initiated at Positive with a $195 price target.
- In addition to Costco’s consistent growth, Dreher also notes the warehouse chain’s commitment to rising online sales — and
its “incredibly strong” board of directors. “Costco Wholesale is a retailer I expect will be there for my children when they grow
up, and COST shares are of the quality I would recommend for my parents to invest in,” the analyst said.
Dillard’s, Inc. (NYSE: DDS) initiated at Neutral
with a $60 price target.
- While Dillard’s occupies a physical corner of the market where it has an advantage — small towns with limited competition —
the internet has impacted the retailer, along with frugal consumers and the decline of malls. Dillard’s is refining and reducing
its locations in favor of stores at popular lifestyle centers, Dreher said. The company has employed a stock buyback program
since 2009 that has reduced the share count by roughly 50 percent.
J C Penney Company Inc (NYSE: JCP) initiated at
Positive with a $8.50 price target.
- J.C. Penney is a company that’s improving, Dreher said. It’s repositioning itself, increasing sales-per-square-foot, cutting
debt and boosting its EBITDA. Penney’s is also positioned to benefit from the closure of physical Macy’s and Sears stores, he
said, and has integration between its online and physical operations.
Kohl’s Corporation (NYSE: KSS) initiated at
Neutral with a $41 price target.
- Susquehanna also views Kohl’s as having a balanced risk/reward profile and fair valuation, and termed the company’s stores “a
better mousetrap,” with centralized checkouts, racetrack aisles, amphitheater shelving and convenient locations. TOn the bearish
side, the company’s Private Label and Executive lines aren’t resonating with consumers, Dreher said, and operating income has
declined each fiscal year since 2011.
Macy’s Inc (NYSE: M) initiated at Neutral with a $31
price target.
- While Macy’s is adjusting its real estate holdings with closures and alternate uses, Dreher said its new Backstage concept is
“potentially harmful” to full-price sales, and added that the company’s EBITDA margin goal of 14 percent is challenging.
Susquehanna is forecasting 11.1 percent EBITDA at the end of fiscal 2016 and 10.2 percent in 2017.
- “We believe hundreds of Macy’s current locations, even half their store base, have an alternate best use that would far
exceed the value of being used as a department store,” Dreher said.
Macy's market cap has plunged
from $24 billion in 2006 to $9 billion today.
Nordstrom, Inc. (NYSE: JWN) initiated at Neutral with a $47 price target.
- Nordstrom’s valuation is fair, and the retailer is diversified, Dreher said. The company’s department stores — which benefit
from good service and locations — are also hurt by declining mall traffic. Nordstrom’s online business’s growth is impacting
expenses, Dreher said, while its Nordstrom Rack line is growing rapidly and attracting millennial consumers.
Ross Stores initiated at Positive with a $80 price target.
- Ross Stores is the largest American retailer dealing only in off-price goods, according to Susquehanna — a “treasure hunt”
form of retail that’s distinct from online sales. The company has potential for growth in the Midwest and New England and will
benefit from the death of other, traditional retailers.
Sears initiated at Negative with a $4 price target.
- Now the dark side. Since merging with Kmart in 2006, Sears revenue has dropped each year, and it’s been “spinning off assets
each year to survive,” Dreher said. Those include Seritage, Lands’ End, Sears Canada, Sears Hometown and Orchard Supply. The
Susquehanna report raises the prospect of bankruptcy as a means to shave $2 billion in pension obligations and monetize the
company’s real estate holdings.
Target Corporation (NYSE: TGT) initiated at
Neutral with a $70 price target.
- While Target’s management is playing to the company’s strengths — fashion, baby, kids, wellness — the retailer also has an
“unresolved identity crisis” in the grocery aisle, Dreher said. Target also faces hard competition in apparel, as well as online
growth that could drive down in-store sales.
Benzinga previously
reported on the retailer's disappointing holiday sales guidance.TJX Companies initiated at Positive with a $92 price
target.
- TJX has a corner on the “deep value” market for name-brand items, Dreher said, and it’s one that appeals to younger and
fashion-conscious consumers. The company’s inventory changes every three to four days, making it competitive with the
ever-shifting online market. Finally, TJX has potential for international expansion, the Susquehanna analyst said.
Wal-Mart initiated at Positive with a $80 price target.
- The retail giant is exiting an investment phase and its returns are accelerating, Dreher said, and it has a history of
outpacing expectations. He also sees Wal-Mart succeeding with its online grocery expansion and purchase of Jet.com, and in the
online sector generally.
Latest Ratings for SHLD
Date |
Firm |
Action |
From |
To |
Feb 2017 |
Susquehanna |
Initiates Coverage On |
|
Negative |
Feb 2012 |
Goldman Sachs |
Maintains |
|
Sell |
View More Analyst Ratings for
SHLD
View the Latest Analyst Ratings
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