The retail industry saw a superb 2012. This has led most people to set higher expectations for 2013. With the help of two stocks in this space, I have tried to gauge the authenticity of these expectations:
hhgregg, Inc. (NYSE:HGG): It is interesting to note that the stock has appreciated 37% on a YTD basis. This has sent bearish signals to the market since such a rally is surprise given that the company has achieved little success in overcoming the secular growth challenges it has been facing. The investment question for HGG in 2013 is how sustainable the competitive advantage is for a big box retailer with ~36% of its sales derived from consumer electronics. HGG’s video category has had nine consecutive quarters of negative comparable same-store sales and continues to see significant margin pressure from Internet competitors.
However, increased promotional cadence from Sears Holdings Corporation (NASDAQ:SHLD), The Home Depot, Inc. (NYSE:HD), and Lowe’s Companies, Inc. (NYSE:LOW) could further pressure the company’s margins. Overall, a limited upside to HGG’s stock in 2013 is expected given its 37% rise YTD, as weak product trends and aggressive promotional activity may keep results under pressure. Credit Suisse has lowered the FY 13, 14, and 15 EPS estimates to $0.76, $0.87, and $1.05, respectively.
RadioShack Corporation (NYSE:RSH): The Street is mostly bearish on the stock given that 2013 is expected to be another transition year in which earnings should remain under pressure. While it is widely believed that exiting the Target Corporation (NYSE:TGT) Mobile business is a positive that should provide some margin relief in 2013, the main themes that have been driving margin pressure (product commoditization, growing mobility business) are expected to continue into next year.
RadioShack’s partnership with Target has been a disaster for RadioShack’s shareholders. According to the partnership, RadioShack was supposed to staff employees at postpaid mobile kiosks in more than 1,500 Target locations. The initial thinking behind the partnership by RadioShack was that it would benefit from the partnership with a stronger retailer, and this deal would also help it to control its overheads. However, in reality, the deal has benefited Target, but RadioShack’s shareholders have lost millions of dollars in this agreement.
Currently expectations are embedding 36% EPS improvement and nearly 130% EBITDA growth in 2013 for RadioShack. Initially, the figures sound unreasonable, but given the weakness in 2012, as well as the margin benefit beginning in April after exiting the Target business, the figures could be attainable with relatively stagnant top-line, flattish core gross margins, and about a 4% reduction in operating expenses and depreciation & amortization. While that makes numbers seem much more feasible, little earnings visibility is currently seen, given:
1. Weaker wireless trends in 2012
2. Continued margin pressure due to promotional activity to drive that business, as well as mix shift
3. Continued declines in consumer electronics categories.
Therefore, the Street has constantly been lowering the estimates for future earnings.
Foolish Bottom Line
It is clear that despite a strong 2012, some of the retailers might not be able to meet the expected estimates in 2013 given a constant pressure on their margins as well as abnormally higher expectations.
The article Does a Strong 2012 Mean a Stronger 2013 for These Stocks? originally appeared on Fool.com and is written by Masam Abbas.
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