The Motley Fool Previous Page

1 Retailer to Buy, 1 to Hold and 1 to Sell

Zain Abbas
September 10, 2013

In one of my earlier posts on hardliners, I  gave a brief overview of three different industries through three different players. This post also aims to focus on another set of industries within this category so that we can have a broad look at the overall sector.

However, there is one interesting thing about this set of companies – two of them have lagged the market. This comes as a surprise given electrifying performance by the group for the year (with gains like +169% for Best Buy and +60% for Staples)

Is E-commerce really a threat for PetSmart?
(NASDAQ: PETM), as the name suggests, is a specialty retailer of pet services. The stock has been heavily punished by the market given the concerns that online competition might eat up the market share of this 'novel' company. However, it should be stated that bear thesis' on this stock lacks bite. Online competition seems to be a rather distant threat, and the tailwind from premium and natural foods will persist, giving the company edge over its competitors.

Traffic growth of roughly 1%, in line with recent trends--and still a standout relative to the broader retail sector--looks more likely going forward than the 2%-3% growth rate of the past two years. The company continues to pull many levers on the merchandising front to drive traffic. One of them is that PetSmart is resetting its entire dog hardgoods (hardgoods are pet supplies like leashes, collars and health supplies)   selection-the first time in the company's history that the category has had an across-the-board revamp. Product adjacencies and displays will be reevaluated and optimized, and the company will introduce about 1,000 new items while culling roughly the same number of product laggards.

As far as the earnings are concerned, the company is expected to post EPS of $0.86 and revenue of $1.71 billion. The company is expected to announce its earnings on Aug 21. Let's see how the CEO addresses the so-called problem of online competition.

Is this an expensive stock to buy right now?
Many investors were disappointed when William-Sonoma's (NYSE: WSM) management gave a tepid raise in the guidance in the last quarter's earnings release. The market believed that this name is not a good investment anymore. However, they were wrong as the stock moved on to climb another 7% in the next quarter (vs. S&P moving only +0.7%). Many failed to understand that conservative guidance is a habit of William Sonoma's management team.

With help from the U.S. housing recovery, a mix shift of sales online, and further buybacks, earnings power seems higher than guided. However, the outlook also incorporates additional investments as international growth ramps.

Though, Williams-Sonoma is a great company with a unique brand portfolio, the shares trade at a multiple reflective of the business' potential (20x FY 13 EPS). The benefits from the company's U.S. housing exposure, the company's aggressive return of capital to shareholders, e-commerce and international opportunities, and future ROIC improvement appear to be captured at this valuation. There could be some upside if the company's competitive position improves – however, this seems far from materializing.

18% of the float shorted for this company
Well most would have already guessed, I'm referring to Sears Holding (NASDAQ: SHLD). The company has been one of the very few retailers who are going through tough times. Some years back, K-Mart bought Sears in an attempt to gain greater ubiquity and wider product choices. In hindsight, this merger appears as a patchwork mismatch of two separate companies that never produced the synergies to move them forward.

The company lacks any major initiatives that might help it progress. That said, the company has continuously been selling its assets in order to offset the cash that it has been bleeding since last year. The company recently (start of 2012) completed its spinoff of Orchard Supply Hardware Stores