Tuesday, March 19, 2013

Shopping Retailing Stocks

I had the chance to go hear Merrill Lynch retailing analyst Lorraine Hutchinson yesterday.

Lorraine has been following the group since 2006, and is one of the better retailing analysts on the Street, in my opinion.  What I particularly like about Lorraine's work is that she combines a good fashion sense with her strong accounting background (she is holds a degree in accounting from Georgetown, and was a CPA for several years before joining Merrill).

Merrill held a retailing conference in New York last week, and attendance was a whopping 700 people.  Lorraine reported that Coach and JC Penny were the most popular sessions.

The big theme in retailing these days is something called "omnichannel".  Essentially this a combination of eCommerce and traditional retailing.  If a customer orders an item on-line, and the retailer's distribution center does not have the product available in inventory, the retailer turns to its retail outlet and ships the item from the store. Not only does this allow quicker turnaround of customer orders, it also allows the retailer to sell more items at full price from its stores.

Most of the companies last week reported that while sales in January were in-line with expectations, February sales numbers were "awful", and it is not clear that March's results have shown much of a rebound. 

The problem, according to Lorraine, is that last year's unusually warm winter created higher than normal sales during the winter of 2012, making comparisons difficult.  The stormy weather on the east coast in February and March has not helped either.

Lorraine has "buy" ratings on several of her stocks, including Urban Outfitters; Ross Stores; and Macy's.  The last pick has been a "home run" for Lorraine:  she was a strong advocate of Macy's when it was priced in the high teens, and most of the Street was urging investors to stay away.  The stock has since doubled.

She remains bullish on Macy's, by the way, despite its recent run.  She notes that she expects the company to continue to grow EPS around +14% this year, yet its stock is trading at a modest 11x P/E. Macy's offers a dividend yield of 1.9%, and an overall free cash flow yield of nearly 10%.

Lorraine also talked about a private company that she is very excited about:  Forever 21.  This is a retailer which offers "fast fashion" (most items priced around $10) primarily to women aged 18 to 25, although it has recently expanded its offers to men in the same age category.  Lorraine thinks that Forever 21 has been hurting retailers who are targeting the same demographic audience, and given the company's rapid expansion plans this could continue to present a problem for its competition.

In all, Lorraine thinks that retailing stocks as a group might struggle this year, but thinks there are enough "good stories" to warrant investor attention.