Discount department retail
Where I like Macy’s, Inc. (NYSE:M) for the high-end sector and Nordstrom, Inc. (NYSE:JWN) for the ultra high-end, I think the discount department store sector is a bit too crowded. This includes Kohl’s, another major department store offering apparel, footwear and accessories for women, men and children. The company also offers soft home products, such as sheets and pillows, in addition to housewares.
Kohl’s is expected to still see interim pressures due to competitive pressures, which are expected to pull same-store sales down 1%. Kohl’s blamed its recent poor earnings performance on “unseasonable” weather, but I believe the pressures will continue for this retailer. As well, margins are likely to be compressed due to clearance markdowns.
The competition headwind for Kohl’s includes other major discount retailers, including The TJX Companies, Inc. (NYSE:TJX) and Ross Stores, Inc. (NASDAQ:ROST). But Kohl’s also competes with apparel retailer The Gap Inc. (NYSE:GPS), and where Kohl’s saw same-store sales down 1% year-over-year during 1Q, TJX saw a 1% gain, Ross a 3% gain and Old Navy a 3% gain.
Saks, another department-store retailer, offers apparel, shoes, accessories, jewelry, cosmetics, and gifts. Saks is more of a niche retailer and analysts expect revenue to increase 3.6% in fiscal 2014 on the back of comp sales growth of 5.4%.
Part of the comp sales growth will be helped by the expected sell-off of under-performing locations. The Wall Street Journal also reported earlier this year that Saks hired Goldman Sachs Group, Inc. (NYSE:GS) to explore strategic options, including a possible sale of the company.
Hedge fund trade
Going into second quarter, there were a total of 39 hedge funds bullish on Macy’s, Inc. (NYSE:M), which is some of the most robust hedge fund interest in the department retail sector. Lee Ainslie’s Maverick Capital had the largest position in the stock, worth close to $276 million, accounting for 3.6% of its total 13F portfolio (check out Maverick’s newest picks).
As for Saks, there were a mere 13 hedge funds long Saks, but still an 8% increase from the prior quarter. Mason Hawkins’ Southeastern Asset Management has the most valuable position in Saks, worth $296 million (see Southeastern’s portfolio).
At the end of of the first quarter, a total of 23 hedge funds were long Kohl’s. However, this is a 36% decrease from one quarter earlier. Anthony Bozza’s Lakewood Capital has the most valuable position in the stock, accounting for 2.4% of its total 13F portfolio (check out Lakewood’s top stocks).
Bottom line
Macy’s, Inc. (NYSE:M) appears to be in great shape, with its customer base being less sensitive to the weak economy. As a result, Macy’s does deserve a premium valuation to other department stores, yet, I don’t feel Macy’s should trade at a discount to Nordstrom, Inc. (NYSE:JWN). Macy’s trades at 0.7 times sales, while Nordstrom is at 1.0 times. Given its valuation and growth initiatives, I think Macy’s is a solid buy.
Marshall Hargrave has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.
The article How High-End Retail Outshines Discounters originally appeared on Fool.com.
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