Shopping for Retailing Stocks

I headed over to the Merrill Lynch offices here in Boston yesterday to learn what is going on in the retailing stocks.


Along with the rest of the consumer discretionary space, retailers have been among the market leaders so far in 2013.

Consumer spending has been surprisingly resilient despite the slow growth in the economy, and the market is apparently betting that the trend will continue.

The resurgence in housing, of course, has played a major role in the growth in retailing.  While companies like Home Depot (a name that Merrill still likes) are direct beneficiaries of improving home sales, other companies also indirectly benefit from improving consumer confidence.

Yesterday's meeting featured three of Merrill's three retailing analysts: Lorraine Hutchinson (specialty realty and department stores), Denise Chai (hardline retailers), and Robert Ohmes (apparel, footwear, and food retailers).

The story they told was somewhat mixed.  Although each featured a few stocks that they particularly favored, they were largely lukewarm on the majority of companies they follow. 

Part of the problem, I think, is that many of the companies have had a very strong run over the last year. Although there were a few exceptions, valuations on many of the stocks only make sense if you believe that the second half of 2013 will see a pick-up in economic growth.

I thought I would highlight a couple of the ideas I heard.

Macy's (M)


This has been a "home run" pick for analyst Lorraine Hutchinson, who has been bullish on Macy's for at least a couple of years.


Management has been able to maintain margins through a number of initiatives, including their "omnichannel" approach which combines traditional retailing with eCommerce. Although the company does not officially report sales channels, Lorraine feels that almost 45% of its sales comes from the internet, making the company one of the largest on-line retailers.

Trading at less than 12x earnings, Lorraine thinks that Macy's has become the best run department store in the U.S. 

Lorraine also likes the fact that management is committed to increasing shareholder returns either through stock buybacks or dividend increases.

Lorraine's price target of $52 offers only modest upside from current levels, since M is trading at around $49 a share.  However, I got the sense that she is leaning towards rising her target over the next few months.

Whirlpool (WHR)

This was analyst Denise Chan's top pick.

Although it is one of the leading global appliance manufacturers, Whirlpool is only followed by nine Wall Street analysts, which is a pretty small group for a $10 billion company.  In Denise's opinion, this represents an opportunity.


Appliance sales follow new home sales, which have been booming. Denise feels that the improvement in housing will continue, and WHR will be the beneficiary, since it has a 40% to 45% market share of the U.S. market.The stock trades at less than 10x her 2014 earnings estimate, and pays a 1.7% dividend yield.

The key to the WHR, in my opinion, is the significant improvement in operating margins that Denise is modeling in her earnings projections.  She thinks that WHR operating margins could reach by 9.5% by 2015, which would represent more than a doubling from 2012 levels.  Denise feels this is achievable, since the company has been aggressively wringing out costs and closing older facilities that are less efficient.

Denise has a price target of $140 for WHR, which would offer a pretty reasonable gain from today's price of $129.

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.