Top and bottom-line expansion helped the entire retail sector rally last year. While the story of earnings growth is still intact with many stocks, there are some that have lost their luster either due to the fact that most of the earnings visibility has already been priced into the stock, or the company doesn’t have a definitive strategy to achieve its targets. Let’s have a look at the following retail stocks.
Tractor Supply Company (NASDAQ:TSCO): A solid performer in 2012, the Street continues to see upside in this name, but following the strong Q4 beat the upside is now somewhat limited. While the stock looks pricey on valuation, the ingredients for earnings upside remain in place. What 2012 showed investors is that this is a sustainable growth story from a top-line perspective, given its physical and market share growth. Tractor Supply Company (NASDAQ:TSCO)’s niche market, solid value proposition, and increasing share of the feed market is expected to continue to drive strong comps. In 2013, solid top-line growth should be supplemented by improving gross margin on easy compares, consistent SG&A leverage, and increasing share buybacks. One risk to the story is that gross margin has been inconsistent over the past few quarters, partially due to temporary issues but also due to a greater mix of consumable (CUE) products, which have higher freight costs. That higher mix is compromising the company’s stated goal of 20 bps of gross margin expansion per year, a goal that has attracted investors to this story. An optimistic earnings scenario for 2013 implies less than 20% upside from here.
The key unanswered questions are what is the plan to put World Markets in Bed Bath & Beyond Inc. (NASDAQ:BBBY) stores, and what do these stores comp and earn? What are the longer-term growth plans for Buy Buy Baby and Cost Plus? On margins, will they stabilize by Q1 next year or are the couponing and mix issues becoming even bigger? An important positive for this stock is that the lack of visibility has made it inexpensive. However, that may not be a bullish sign at all given that the market has seen other inexpensive stocks become even cheaper as margins cratered. In the near term, the guidance points to margin pressure, but it seems that the stock already reflects that. Credit Suisse has a target price of $70.
This stock has received some bullish comments in context of the US housing recovery. Recently, one of its peers, Restoration Hardware (NYSE:RH) has been surging given the positive reports on housing starts. The home furnishing company is up by nearly 15% since the announcement made at the start of the year that housing starts for 2012 were the fastest read since 2008. This stock has also been the center of interest given that the furniture industry outperformed the entire retail sub-segments.
I still remember that Jim Cramer said in one of his Lightning Rounds by the end of Jan. that, “People don’t like this stock. I do. I think it is a great play on housing.”
At that time the stock was trading at $36. Just a week after that program, the stock rallied to $40 (which means almost 13% gain in a week). However, the stock has lost those gains recently Leon’s Furniture reports suggest that furniture demand might be pulling back after due to a potential consumer spending pullback. However, I believe this might not be true given the recent rally in the consumer confidence index gauged by University of Michigan Survey of Consumer Confidence Sentiment.
Foolish Bottom-Line
In case of both Tractor Supply and Bed Bath & Beyond, investors seem to face considerable confusion given inconsistent performances and lack of solid future strategy. These stocks might become attractive once the clouds of uncertainty disperse.
The article Have These Stocks Lost Their Luster? originally appeared on Fool.com.
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