Jubak's Journal Recent articles: • 3 ways to capture the September effect, 9/28/2004 • New tricks for Dogs of the Dow, 9/24/2004 • Welcome to the bankruptcy economy, 9/21/2004 More... | Jubak's Journal 5 retailers ready for the holidays These companies showcase the best approaches to pulling in customers by picking merchandise correctly, pricing it at the right levels and keeping their best sellers in stock as long as demand lasts. By Jim Jubak Retailers havent had it easy in the last couple of months. August same-store sales gains were weak, even after factoring in the shift of Labor Day sales to September this year from August 2003. (I bet you thought Labor Day fell in September every year.) September, many speculate, will come in below expectations, too, thanks to hurricanes Ivan and Jeanne. UBS figures that the storms, which closed most Florida stores for about two days, knocked about one percentage point off same-store sales growth. So why have retailers turned in one of the strongest stock market performances over the last month, with the specialty retail industry, for example, up almost 7%? Can you say December holiday shopping? Investors are looking past current weakness in expectation that a strong October will lead to a strong holiday shopping season. Holiday deliveries start hitting stores in October. Inventories are at reasonable levels, despite the August and September weakness. So it looks like fiscal third-quarter earnings wont be crushed by big markdowns and early sales. Forecaster Retail Forward is projecting that holiday sales will climb 6% to 6.5% from last year, which would beat the 5.1% increase recorded in the 2003 holiday season. Even the Grinch among retail forecasters, Davidowitz & Associates, is projecting a 3% to 4% increase. The three stocks I recommended during my 11:20 a.m. ET appearance on CNBCs "Morning Call" Wednesday make up a best-of-the-best approach to the sector. In any shopping season, the retailers that execute best collect more than their shares of sales. So it makes sense to go with those retailers that have had a hot hand recently at picking merchandise, pricing it and keeping their best sellers in stock as long as demand lasts (and not a moment longer). The hot hand The details are even better. Gross margin increased by 4.6 percentage points as the company cut costs by directly sourcing more of its clothes and shifting its sales mix to include more luxury goods. Inventory grew by 9.4%, below the 27.3% sales growth, a sign of tight controls and smart product decisions. The company will start a major brand building advertising campaign with $2 million to $5 million in ads on Election Day. After opening 11 new stores in the fiscal second quarter, Jos. A. Bank is on track to open 55 to 65 stores in 2004, up from 50 stores in 2003, as the company continues its expansion in the recently entered California and Florida markets. Shares currently trade at 16.9 times projected earnings for the fiscal year that ends in January. Our StockScouter on Sept. 29 rated Joseph A. Bank a 9 out of a possible 10. Being on the right side In its Sept. 8 update on the quarter that ends on Oct. 31, the company said that sales were significantly ahead of plan, which could put same-store sales growth up better than 10% for the quarter. That would be enough to let the company beat earnings expectations again, despite projections for 53% earnings growth in the October quarter and 72% growth for the year that ends in January. A quarterly surprise probably shouldn't be a surprise since Urban Outfitters has crushed Wall Street earnings projections for the last five quarters by an average of almost 18%. The shares trade at 31.9 times projected earnings for the fiscal year that ends in January. This kind of multiple makes this a pick with high potential rewards and high potential risk. Our StockScouter on Sept. 29 rated the shares a 7 out of a possible 10. Turning the ship around The turnaround to date? In the last year, J.C. Penney has retired or repurchased $950 million in debt, significantly strengthening its balance sheet. It has increased sales per square foot to $143. And the sale of the Eckerd drug store division raises the odds that the company will start to generate positive free cash flow on a regular basis. (In four of the last five quarters, the company has shown negative free cash flow.) And the turnaround ahead? The $3.5 billion in net cash from the Eckerd sale gives the company room to reduce debt further and buy back shares. An improvement to an investment-grade credit rating isnt out of the question in 2005, which would allow the company to cut its borrowing costs and free up more cash flow. Cost cutting has been significant, but the $50 million in annual savings produced this year are projected to be just the first step to reach annual savings of $200 million by the end of 2005. Finally, the companys new strategy of building stores where the population is instead of occupying space in a mall should drive sales per square foot in new stores toward $200, well above the current average. The shares trade at 17.5 times projected earnings for the fiscal year that ends in January. Out StockScouter on Sept. 29 rated the stock an 8 out of a possible 10. 2 exclusive picks for CNBC.com on MSN readers The companys fiscal second quarter was better than Wall Street expected. It posted a loss of just 6 cents a share rather than the 11 cents a share loss projected and better than the 19 cents a share the company lost last year. Sales increased 8.8% and same-store sales rose 2.9%. Gross margin was boosted by two percentage points. Cash climbed to $954 million ($4.88 a share) thanks to the sale of the companys credit-card operations. But the company continues to trail industry leader Best Buy But did I mention that the stock is cheap? Best Buy trades at a price-to-sales ratio of 0.67, making it 2.3 times more expensive than Circuit City. Circuit City trades at 35.6 times projected earnings per share for the fiscal year that ends in February. Our StockScouter on Sept. 29 rated the stock a 7 out of a possible 10. Doing its best Dangerfield As part of its effort to launch a store remodeling program designed to increase sales and improve margins, the company discovered that remodeling stores wasnt nearly as important as achieving the right mix of products and services to get customers into the stores. The companys new C3 store format emphasizes core categories such as wireless, accessories, power and services to reach the 20% return on invested capital target set by the company for the new store format. RadioShack expects to have 550 stores converted to the new format, about one-tenth of the companys 5,121 stores, by the end of 2004. Its stock trades at 13.6 times projected 2004 earnings per share. Our StockScouter on Sept. 29 rated it a 7 out of a possible 10. Editor's Note: A new Jubaks Journal is posted every Tuesday and Friday. E-mail Jim Jubak at jjmail@microsoft.com. At the time of publication, Jim Jubak did not own or control shares in any of the equities mentioned in this column. He does not own short positions in any stock mentioned in this column. | |||||||||||||||
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