The house rules are simple in this weekly column.
I bash a stock that I think is heading lower. I offset the sting by recommending three stocks as portfolio replacements.
Who gets tossed out this week? Come on down, Target
Ixnay on the Tar-jay
I have historically been bullish on the "cheap chic" discounter. It may not be the biggest or the cheapest discount department store, but it's the one that most people aren't embarrassed to be shopping at, for the most part.
No one ever posts "I'm going to Kmart" on Facebook. Target is a more socially acceptable shopping outlet.
However, a Wall Street Journal article earlier this week details the lengths that Target is going to in order to nip showrooming in the bud. What's showrooming? Well, it's what some retail analysts are calling the growing practice of shoppers armed with smartphones or access to comparison-shopping websites entering stores to check out goods before buying them for less online.
Target has been reaching out to its vendors, asking them to offer the chain specialized products that shoppers can only buy at the discounter. If a vendor can't provide exclusivity, Target's asking for pricing discounts so it can match the price points of online-only operators.
It's easy to see the flaw in Target's thinking. Why would vendors give Target a price cut? Why should suppliers bear the cost discrepancy between running a brick-and-mortar operation and the limited overhead of a streamlined e-tailer? Why would a vendor sacrifice margins in replacing the same sale?
Target will fare better in its cry for exclusivity or special editions of certain products, but never to the point where a vendor will forgo overall sales growth.
Showrooming is inevitable -- and it will only become a growing problem for Target and its physical-retailing peers.
Target's already feeling the pain. Analysts see flat earnings growth for this holiday quarter that concludes next week. Wall Street is bracing for profitability to climb by a mere 1% -- on a 4% top-line uptick -- for the new fiscal year that kicks in next month.
Sure, Target may seem cheap at 12 times earnings with a decent 2.4% yield, but where's the growth? As more consumers arm themselves with smartphones, showrooming will see lines at the register continue to thin out.
Target hosed down its quarterly guidance earlier this month. As a result of weaker-than-expected holiday sales in December, the discount department store operator now sees fiscal fourth-quarter earnings coming in between $1.35 a share and $1.43 a share. Its previous target was as high as $1.53 a share.
Things won't get any better with its anti-showrooming initiatives. Target will be forced either to slash margins by cutting prices or to forgo sales. Either way, the bottom line is going to take a hit, and even the 1% increase that analysts are targeting for the year ahead may prove to be too aggressive.
As I do every week, I don't talk down a stock unless I have three alternatives that I believe will outperform the company getting the heave-ho. Let's go over the three fill-ins.
(Nasdaq: AMZN): We all know that Amazon, Target's former online partner, is eating its lunch. At least one of the initiatives that Target is proposing to vendors -- discounted pricing on subscriptions for repeat purchases -- is something that Amazon has been doing for years. However, there are some things that Target will never be able to do as efficiently as Amazon. The lean infrastructure that affords Amazon the opportunity to sell goods at meager markups will always make Target more expensive on similar goods. Amazon's ability to sacrifice margins because it's cashing in on the technological end through hosting and merchant services will never be matched by Target or anyone else. It's true that Amazon is a very expensive stock, and that it's going through its own margin contraction as it emphasizes Kindle sales. However, analysts see Amazon growing its revenue by 33% in 2012. It's the one swiping market share from the real-world merchants. Why buy trouble when you can bet on the troublemaker?
(NYSE: KSS): If Target has a "cheap chic" kissing cousin, it would probably be Kohl's. Both stocks have similar valuations. Kohl's is fetching just 11 times earnings with a 2.1% yield. The difference here is that Kohl's emphasis rests nearly entirely on clothing and related accessories. Target sells electronics and media items that are prone to showrooming. That's not Kohl's. Target will experience declines in CDs, DVDs, video games, and books as the digital migration continues. Kohl's just wants to sell you a marked-down pair of slacks and a navy blazer. Clothing will be the last bastion of showrooming-proof retail, and Kohl's is in the right place. Unlike Target's near-term lethargy, analysts see Kohl's growing its earnings by nearly 17% during the upcoming fiscal year.
(Nasdaq: AAPL): This may be a trendy pick after last night's announcement of a blowout quarter, but I may as well eat crow after being skeptical of the class act of Cupertino in recent weeks. Apple revealed earlier this month that it will be opening bite-size Apple Stores inside 25 Target stores that are far removed from stand-alone Apple storefronts. We can applaud this as a move for both companies, but when you consider that both Apple and Target are fetching roughly 12 times projected earnings over the next four quarters, why would you side with the laggard?
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Longtime Fool contributor Rick Munarriz calls them as he sees them. He does not own shares in any of the stocks in this story. Sensing that "showrooming" will be a buzzword that will haunt traditional retailers for some time, Rick just registered Showrooming.net. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.