A Few Ideas to Kick Around in the Retail Space

TK All-Star posted on 12/06/12 at 09:39 AM

Alan Brochstein Takes a Look at Shoe Stores

I have a confession: I hate to shop for clothes. In fact, except for groceries and wine, I don’t like to go to any stores, though I make an occasional exception for Men’s Wearhouse (MW). So, it’s somewhat surprising to me that I am fascinated with retail stocks. I have shared my ideas on this blog frequently, and many have proven successful. One that comes to mind was the J. Crew Group, which agreed to be acquired shortly after I wrote about it two years ago at 43.50, a big premium to the 32.11 level at the time I wrote my article. Notice, too, I had cited Chico’s (CHS) as attractive as well, and it has doubled since then, while the third stock has remained relatively unchanged.

My modus operandi in the retail space has been honed over the past decade or so. Unlike with stocks in other sectors, I tend to accept that retailers tend to go in and out of favor with their customers rather frequently. This leads me to employ a mean-reversion strategy, where I favor stocks that have perhaps lagged both fundamentally as well as technically. Of course, one has to be careful not to fall into the trap of investing in a company that is in permanent decline. So, this means to try and find “good” companies and try to buy them on “bad” news.

One of the areas within retail where I have focused my attention far more than I would have ever expected is shoes. Another confession: I haven’t bought a pair (except for my son) in over two years. As an aside, he wears a size 15 shoe and tends to shop online, but that’s a whole other story. Shoes are interesting to me because while they have a discretionary element, they are also somewhat non-discretionary. Not only do they wear out and need replacement eventually, but, for our kids, changes in feet size drive a certain amount of demand. While fashions come and go in the industry, it’s really a basic necessity.

One positive for the industry has been consolidation. Timberland was acquired by VF Corp (VFC) a year ago, Collective Brands (which included Payless) was acquired by a private equity firm earlier this year and rumors abound concerning others in the sector. For instance, on 12/3, Jim Cramer discussed rumors about Deckers Outdoors (DECK), the maker of Uggs and Teva, suggesting that VFC could be interested. On 12/4, Leonard Green & Partners disclosed a stake in DSW (DSW), following its acquisition of BJ’s Wholesale in 2011 after disclosing a stake in 2010. By the way, Leonard Green & Partners was one of the buyers of J. Crew Group too. I don’t ever recommend chasing rumors, but the fact that the industry is consolidating can bode well for everyone. Since I just participated in a conference call where I learned a lot about one of the companies in the shoe store industry that I hadn’t followed too closely, I was inspired to take a look at the universe of publicly-traded shoe companies:

Please keep in mind that these are not recommendations. You should do your own research before buying or selling any stock.

The table above is generated using Baseline. Before I share the three ideas that are interesting to me, let me explain what I have done. First, the list is sorted by PE, with the cheaper names near the bottom. This column, in the middle of the page, shows an average PE of 13.7, not too different than the overall market.

To the left, I have included the amount of debt (less cash) relative to capital (debt plus equity). Notice that most of these stocks have no net debt. In the next column, I highlight in green those stocks that have rallied by more than the S&P 500’s 12% gain this year – a majority. The three in red are actually down.

While I sorted the stocks on PE, I include a different measure of valuation: Enterprise Value to EBITDA. This metric takes into account cash and debt levels and also looks at a measure of earnings that excludes interest, taxes and depreciation and amortization.  The three stocks I highlighted in green trade below 6X trailing EBITDA.

Finally, I included some growth metrics, highlighting those companies growing sales or earnings strongly in green and those shrinking in red. I also included a final column that highlights how analysts are changing those estimates. Over the past three months, the ones in green have experienced positive revisions, while analysts have cut estimates on the three in red.

Shoe Carnival (SCVL) is the one I know the best, as I have followed closely this value-oriented non-mall family-oriented shoe store for 5 years. They are growing their store base, with entries into Dallas and Puerto Rico this year. I find the stock to be quite reasonable at this price and am encouraged by very substantial insider ownership along with a recently implemented dividend.

Finish Line (FINL) is the stock that recently captured my attention after I listened to a presentation by management. Not only does it appear to be quite inexpensive at 5X EV/EBITDA (they have about $5 per share in cash net of debt), but there are two specific drivers. First, they recently launched an e- commerce initiative. Second, they signed a deal with Macy’s to run their shoe stores.

Finally, while I don’t know Genesco (GCO) that well, it too looks quite interesting given its valuation and its history of growth. The stock is down this year, perhaps providing a good entry. This company has some international exposure after a recent acquisition and includes brands like Journeys, Johnston & Murphy, Dockers and Lids Locker. It operates 2400 retail stores.

If you are looking for new ideas, I think that shoe retailers are interesting given recent consolidation, good performance generally, and fair valuations. I have noticed in the past that when gasoline prices are falling, as they have been recently, consumers tend to loosen up the purse strings for shoe purchases. I have highlighted three stocks within the sector that appear to offer value and that are perhaps worthy of further investigation.

Alan Brochstein
Founder, Invest By Model and AB Analytical Services
TradeKing All-Star Commentator

Disclosure:  Long CHS in a model at Invest By Model

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Posted by TK All-Star on 12/06/12 at 09:39 AM


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