Do we really have to wait a few more weeks before burying 2007 for good?
Retailers have had a rough run lately. Amid recessionary fears, minimum-wage hikes, and the gradual migration to e-tail, chains are being squeezed all over.
Not all hope is lost, though, as long as you know where to find the opportunities. Weakness at one strapped retailer may spell an opportunity for another. Certain trends in 2008 may turn the moribund into the lively.
I'll tell you the retail stocks that I'm expecting to make a move in the coming year. Let's see whether we can breathe some new life into this sleepy sector.
Best Buy
I've already gone out on a limb to tap the consumer-electronics giant as one of the top stocks to own next year. When broadcasters abandon analog signals come early 2009, folks will be pouring in to buy digital television sets to avoid hooking up cumbersome converter boxes to their obsolete TVs.
Despite the industry's favorable tailwind, many of Best Buy's competitors, including Circuit City
Lumber Liquidators
Knock on wood? That's what the market did when Lumber Liquidators went public last month. The hardwood-flooring specialist was hoping to go public at $12 to $14 a pop, had to settle for $11, and is now trading in the single digits.
"Of course," you say. The housing market is in a funk. There's no need for flooring if there's no appetite for the house as a whole. But that's not a fair assessment. In an Associated Press article that followed the disappointing IPO, the company's CEO pointed out that 80% of the company's customers are existing homeowners looking to spruce up their present digs. In fact, even though demand for hardwood flooring in general has been waning, Lumber Liquidators has rattled off 23 consecutive quarters of same-store-sales gains. Comps actually clocked in 8.6% higher through the first nine months of 2007.
Now, I'm not naive. A lot of homeowners need to borrow money for a hardwood makeover, even at Lumber Liquidators' rock-bottom prices, and the subprime fiasco is making creditors very particular about their lending habits. Then again, the Federal Reserve's rate cuts may very well spur cash-out refinancing to fuel home-improvement projects. Until comps head lower, I'd argue that Lumber Liquidators is immune to the housing market's weakness.
Restoration Hardware
Yesterday's quarterly report wasn't pretty at Restoration Hardware. The retailer of fine home decor posted a wider loss for the period. The top line inched 11% higher, thanks to a boom in consumer-direct sales that counteracted a sales dip at the store level.
Not too many people are paying attention to Restoration Hardware's financials at this point. Once the company received a $6.70-per-share private-equity buyout bid, Sears Holdings
The floor is pretty much established, but the ceiling may not seem all that high. I disagree. I see Sears Holdings floundering on its own. It needs an upmarket concept that it can use to boost the housewares prestige within its Sears locations, because the image of those stores sank after the company acquired the real estate-rich but brand-poor discounter Kmart. Even if the bidding war doesn't heat up, Sears needs this. The synergies are too powerful, far beyond the valuation metrics of conventional private equity buyouts.
Cabela's
I singled out Cabela's last month as a door-buster stock. The outdoor-gear superstore concept -- a literal feast for the senses with its theme park-esque stores that feature large fish tanks and wildlife replica displays -- needs the market to breathe the fresh air outside.
Sure, profits took a small hit this past quarter, but the shares are now trading at just 10 times next year's analyst profit target of $1.62 per share. You don't need to look through the scope of one of its hunting rifles to see that cheap is within the crosshairs at Cabela's.
Putting it all together
There will be other winners, of course. I didn't single out any of the specialty apparel chains, because it's hard to get an early read on who is playing the hot fashion trends, but there always seems to be a darling there despite the malaise elsewhere.
I also avoided singling out any of the discounters, even though chains such as Big Lots
Ultimately, my point is to make sure that you don't dismiss retailers just because they've had an off year. Doing so may have spared your hide in 2007, but it's no way to look a gift 2008 in the mouth.
