The industry is also extremely broad, with wholesale retailers on one end, discount superstores in the middle and dollar stores on the other end. Each of these groups is constantly trying to outmaneuver the others, through bulk discounts, membership plans or strategic store placements. With all that maneuvering, certain companies are bound to be left behind. In this article, we’ll examine two retailers that investors should dump, and one that they should buy to profit in today’s rapidly shifting retail environment.
The zombie retailer
Sears Holdings Corporation (NASDAQ:SHLD) is often mentioned in the same breath as its troubled retail peer, J.C. Penney Company, Inc. (NYSE:JCP). The two companies indeed share a lot of similar characteristics – leadership changes, an unclear path for the future, consistently declining same-store sales and dwindling cash flow.
Sears has been stuck in a constant decline over the past five years. The only reason its top line bounced back over the past year was due to sales of real estate and other assets. Massive store closures, especially at Kmart, and tighter inventory controls have also helped. Yet Sears lacks the one thing it truly needs to bounce back – a viable plan to reverse seven consecutive years of declining same-store sales.
Therefore, it wasn’t surprising when Sears reported dismal first quarter earnings, in which the retailer reported a massive net loss of $2.63 per share, or $279 million, down from a profit of $1.78 per share, or $189 million, in the prior year quarter. That steep slide far exceeded the Thomson Reuters analysts’ consensus estimate for a loss of $0.60 per share. Revenue dropped 9% to $8.5 billion, also missing the analyst estimate of $8.74 billion.
Same-store sales decreased 3.6%. Sears attributed the slide to a cool spring, which caused lower sales of its seasonal products, such as spring clothing and outdoor merchandise. However, I believe that Sears’ problems run far deeper.
Increased competition from superstores such as Wal-Mart Stores, Inc. (NYSE:WMT) and Target Corporation (NYSE:TGT) on the lower end, department stores such as Macy’s, Inc. (NYSE:M) and Nordstrom, Inc. (NYSE:JWN) on the higher end, and e-commerce giants like Amazon.com, Inc. (NASDAQ:AMZN) and eBay Inc (NASDAQ:EBAY) on the direct-to-consumer front are Sears’ real challenges. There’s simply no room left in this crowded market for the laggards.
What’s more depressing is that Sears’ answer to these problems is the same old song. It plans to sell its protection agreement unit and reduce expenses by $200 million, with an ultimate goal to generate liquidity over $500 million. In other words, this company is a zombie retailer that is keeping warm by burning the furniture, and investors would be smart to avoid or sell this one.
Missing the target
Target Corporation (NYSE:TGT), on the other hand, is far more profitable than Sears. However, most investors were already expecting the company to miss its first quarter earnings after its primary rival Wal-Mart Stores, Inc. (NYSE:WMT) dropped the ball earlier this month.
For its first quarter, Target earned $0.77 per share, or $498 million, down from the $1.04 per share, or $697 million, it earned a year ago. Adjusting for one-time benefits and charges, Target Corporation (NYSE:TGT) earned $0.82 per share, which missed the consensus estimate of $0.85 per share. Revenue declined 1% to $16.71 million, which also came in below the expected $16.8 billion.
Just like Wal-Mart Stores, Inc. (NYSE:WMT) and Sears, Target blamed the cooler spring season for its top and bottom-line declines. Sales of seasonal products such as apparel, sporting goods and outdoor furniture were weak, contributing to a same-store sales decline of 0.6% – a big drop from the same-store sales growth of 5.3% it reported in the first quarter of 2012.
Target Corporation (NYSE:TGT) is attempting to expand into Canada, opening 24 stores there during the quarter and adding 24 this month. Target intends to have 124 Canadian stores up and running by the end of the year. Yet this expansion caused SG&A (selling, general and administrative) expenses to rise 5.8%, while net interest expense rose from $184 million to $629 million. It is also incurring losses from its Canadian operations, which had an adverse impact of $0.24 on non-adjusted earnings per share.
Target also reduced its full year earnings outlook from $4.85-$5.05 to $4.70-$4.90, casting doubt on the company’s growth potential. In my opinion, Target Corporation (NYSE:TGT)’s weak same-store sales, its top and bottom line declines and aggressive, costly expansion into Canada are all reasons to avoid this stock.
A hidden money tree
That brings us to the hidden threat to lower-end department stores like Sears and superstores like Target – dollar stores. Over the past few years, dollar stores have been evolving from lower-end thrift stores into full-service discount superstores. Companies such as
Dollar Tree, Inc. (NASDAQ:DLTR), Dollar General Corp. (NYSE:DG) and Family Dollar Stores, Inc. (NYSE:FDO) have started carrying more fresh food, name brand household items, and cigarettes with the intended goal of stealing market share from Target Corporation (NYSE:TGT), Wal-Mart Stores, Inc. (NYSE:WMT) and Costco Wholesale Corporation (NASDAQ:COST). These dollar stores are also positioning themselves closer to lower-income neighborhoods, where fuel costs are a major concern. Lower-income shoppers are more likely to shop at closer stores if the products and prices are comparable to Wal-Mart Stores, Inc. (NYSE:WMT) or Target.
The strength of this strategy shines through with Dollar Tree, Inc. (NASDAQ:DLTR), which I consider to be the strongest company in the industry. Dollar Tree recently reported first quarter earnings of $0.60 per share, or $133.5 million, up from $0.50 per share, or $116.1 million, a year earlier. This topped the analyst forecast by three cents. Revenue also climbed 8.3% to $1.87 billion, meeting the consensus estimate. Same-store sales increased 2.1%.
Dollar Tree, Inc. (NASDAQ:DLTR) is also expanding aggressively, opening 94 stores during the quarter. Its stores are also getting bigger, with the square footage of locations rising 7% year-on-year to 41.2 million total square feet. I firmly believe that Dollar Tree’s strategy to ramp up the pressure against discount superstores will work, as seen with its strong top and bottom-line growth and rising same-store sales.
The Foolish bottom line
In conclusion, let’s compare the fundamentals of these three retailers to see if my opinions are justified.
Forward P/E | Price to Sales (ttm) | Return on Equity (ttm) | Debt to Equity | Profit Margin | Qty. EPS Growth (y-o-y) | Qty. Rev. Growth (y-o-y) | |
Sears Holdings | N/A | 0.16 | -28.06% | 98.36 | -2.33% | N/A | 1.80% |
Target | 12.40 | 0.60 | 18.52% | 106.58 | 4.09% | -2.00% | 6.80% |
Dollar Tree | 15.64 | 1.47 | 41.12% | 16.27 | 8.38% | 21.70% | 15.40% |
Advantage | Target | Sears | Dollar Tree | Dollar Tree | Dollar Tree | Dollar Tree | Dollar Tree |
Source: Yahoo Finance, 5/24/2013
While Target Corporation (NYSE:TGT) and Sears may look fundamentally cheaper at first glance, a look at the rest of these numbers show that Dollar Tree, Inc. (NASDAQ:DLTR), with lower debt, higher margins and double-digit top and bottom-line growth, would be a much better investment. In addition, if the economy crumbles again, Dollar Tree can thrive better in a recessionary environment than either Target or Sears.
The article Two Retailers to Sell and One to Buy originally appeared on Fool.com.
Leo is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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