Best Buy Co., Inc. (BBY), Staples, Inc. (SPLS): Retail Turnarounds Can Be Good Speculative Plays

Staples, Inc. (NASDAQ:SPLS) probably has sufficient liquidity for the next year with a cash-to-additions in property & equipment ratio of 2.2x based on adjusted cash of about $800 million (booked cash of $1.3 billion less $500 million for maturing debt) and expenditures of $350 million.

The company posted $24.4 billion in revenue and about $1.1 billion in cash earnings for its latest fiscal year. Based on a 5% discount to these earnings and a 10x-to-11x multiplier, mainly due to benefits from a recently announced merger between two major competitors, Staples’ fair business value is around $15 to $17 per share.

Kohl’s Corporation (NYSE:KSS)

Department store operator Kohl’s Corporation (NYSE:KSS) is a different turnaround situation. While not showing any meaningful sales decline, its operations have had little growth and inconsistent results. The shares have a 52-week high of $55 and low of $41.

Its latest quarterly revenues increased 5.4% to $6.3 billion, including one extra week. Excluding the extra week, net sales climbed 2.5% from the prior-year quarter to approximately $6.2 billion. Kohl’s (NYSE:KSS) comparable store sales increased 1.9% from the prior-year with an improvement in inventory levels.

The company’s liquidity position is a bit muddled. It posted a negative cash-to- additions in property & equipment ratio with cash of about $537 million and expenditures of $785 million. But that seems mostly due to aggressive share buybacks of $1.2 billion last year and $2.3 billion in the previous year.

Given that Kohl’s generated $381 million of free cash flow in 2012 and assuming that if they had refrained from using some $600 million for buybacks, its cash- liquidity ratio would be closer to an acceptable 1.4x.

The company also has a handy five-year, $1 billion senior unsecured revolving credit facility without any draws during 2012 or 2011. Considering these circumstances, the company’s cash position is probably alright but should definitely be monitored.

In the past year, the company recorded $19.3 billion in revenue and about $1.3 billion in earnings. With a 5% earnings-cut and a slightly discounted 10x-to-12x multiplier, Kohl’s fair business value calculates to a range of $54 to $65 a share.

Conclusion

Revamping a retail operation isn’t easy. There is a real chance a company can go bust. But even a moderately successful turnaround may offer excellent returns. Keeping an eye on a retailer’s cash and valuation can help increase the odds that a speculative investment in this area turns out well.

The article Retail Turnarounds Can Be Good Speculative Plays originally appeared on Fool.com and is written by Bob Chandler.

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