Will These Stocks Perform in the Long Run?

The retail business seems to be having its fair share of problems. Numbers coming in for the last quarter have been disappointing, to say the least. What then should investors do--cash out or stay? Let's find out.

Losing its shine?

The first among the major retailers to report numbers this season was Macy's (NYSE: M  ) .

After reporting some superb numbers in the previous quarter, the company failed to impress investors this time around. Net sales totaled $6.1 billion, down 0.8% from $6.1 billion in the previous year. Net profit amounted to $281 million, compared to $279 million in the prior year. At $0.72 per share, diluted earnings were up 7.5% from the prior year. Weak consumer spending was stated as the main cause behind Macy's poor performance. According to top executives at the company, consumers are spending more on big purchases like cars and homes at the moment. As a result, demand for retail items such as apparel, footwear and electronics are on hold. In the next two quarters, the company expects comparable sales to grow by 2.5%-4%.

A wee bit better

Wal-Mart (NYSE: WMT  ) , which also released its last quarter numbers this month, only did slightly better. Wal-Mart's net sales totaled $116.2 billion, up 2.4% from the prior year. Net income saw a modest growth of 1.3% from the same quarter the previous year. Diluted earnings amounted to $1.24 per share, as opposed to $1.18 last year. Wal-Mart's main cause of concern has been the payroll tax hike. The company has also tapered its expectations for the year ahead.

Canadian woes

Target (NYSE: TGT  ) , the latest among retail brands to report low numbers, has another factor to blame. The retailer's expansion plans in Canada have proved to be more drawn out than anticipated, putting a pressure on the company's profits. At $611 million, net earnings for its last quarter were down 13.2% from the previous year. Total revenue amounted to $17.1 billion, producing 2% year-over-year growth. The 2% hike in payroll tax has also been a concern for Target, which has cut down its outlook for the rest of the year.

Plans and such

With customer spending occurring in waves and the economic recovery still on hold, the best bet for the retailers would be to focus on driving sales by making their products and offers more attractive. Wal-Mart, for instance, has, for the first time, offered free layaway with zero opening fee. The offer, starting from Sept. 13 for three months, will include a wider range of products as compared to previous years. Last year, when there was $5 layaway fee, sales got a 10% boost. This year, the boost should be higher, given the more attractive offer. The boost, however, will be temporary.

Macy's management sounds optimistic about its back-to-school sales in August, which is apparently turning out to be better than the year before. Keeping in mind the price sensitivity of the middle class customer, the company has plans to tweak its marketing strategies to create greater demand for its products in the next two quarters. However, the company has revised its outlook for the full year downwards, assuming little improvement in consumer demand.

As for Target, price matching policies, REDcard Rewards, Pharmacy Rewards and higher discounts are on its agenda for the year ahead. The company also plans to improve its mobile app Cartwheel to drive sales further.

Will they work?

Despite continued efforts to boost sales, the future looks pretty dull for these retailers. In a recovering economic scenario such as now, little can be done to improve bottom and top line numbers. Until wages see a significant hike over and above the inflation rate, consumer spending will remain at low levels. In the next few months, this looks unlikely. At the moment, it's best if investors keep away from these stocks.

In the long run, however, these stocks have potential. Macy's projects a healthy business structure with high potential for growth. At a relatively low P/E of 13.10, it can prove to be a good long term investment, once the recent slowdown in demand is overcome. Wal-Mart also has bright prospects in the long run. The ever-expanding company has a policy of purchasing shares, and has a decent dividend yield of 1.88%. Target, the second largest retailer in the country, is known for its consistent earnings growth and handled the recession relatively well. Economies of scale and resilience are what make this company tick in the long run. 

The retail space is in the midst of the biggest paradigm shift since mail order took off at the turn of last century. Only those most forward-looking and capable companies will survive, and they'll handsomely reward those investors who understand the landscape. You can read about the 3 Companies Ready to Rule Retail in The Motley Fool's special report. Uncovering these top picks is free today; just click here to read more.


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