Retail May Shine Amid Housing’s Gloom

04/10/2007 12:00 am EST


John Dessauer

President, John Dessauer Investments, Inc.

John Dessauer, editor of John Dessauer’s Investor’s World, thinks some retailers will continue to do well despite all the worries about housing’s weakness and the economy’s imminent demise.

Wall Street and the crowd are afraid that the housing slump will dent consumers’ ability to keep spending. Solid job and income growth keep consumer finances healthy. Our retail stocks have done well, and they should keep doing well.

Kohl’s (NYSE: KSS, $78.47) shocked Wall Street with a 4.4% rise in February same-store sales and fourth fiscal quarter earnings up 29% (five cents a share better than expected). This news prompted one analyst to raise Kohl’s to a Buy. Kohl’s earned $3.31 a share in fiscal 2007 (ending January 31). Based on a very strong fourth quarter, analysts have raised estimates for this fiscal year to $3.83 to $3.95.

Kohl’s earnings have more than doubled in the last five years. The stock, however, is right where it was five years ago. Analysts now say Kohl’s can keep growing earnings at a 17% annual rate. That indicates potential earnings of $7.25 a share in five years. The stock will follow earnings, doubling in five years or less. Kohl’s is a Buy.

Abercrombie & Fitch (NYSE: ANF, $76.49) finished fiscal 2007 (ending February 3) on a strong note. For all of fiscal 2007, ANF earned $5.59. Management says first-half results will be
$1.47 to $1.52, well above the $1.34 earned in the first half last year. Abercrombie not only has a strong balance sheet and high profit margins but has been doing an excellent job managing its stores and merchandise.

Analysts disagree, however, about Abercrombie’s ability to stay ahead of the competition. The doubters see long-term growth of 14% a year.  Others say the stock, at less than 15x this year’s estimated earnings, is trading at a discount to its peers. That discount is not warranted, based on the company’s past performance. Abercrombie has more than doubled earnings in the past five years and can lift earnings to nearly $9.00 a share in the coming five years, so I still rate it a Buy.

Home Depot (NYSE: HD, $38.08) is not doing as well as our other retail stocks, due to the housing hysteria. The stock is very attractive for above-average long-term growth potential. Home Depot owns 87% of its stores, on prime properties. The balance sheet is strong. I have seen calculations that the break-up value could be $56 a share. Home Depot could become the target of a private equity buyout or a leveraged buyout by management and others.

Home Depot is growing overall sales even though same-store sales are declining. If new management is successful, we will see same-store sales grow again. As the housing market stabilizes and begins to grow again, Home Depot has the potential for more pleasant surprises. At just 14x the midpoint of depressed earnings estimates, Home Depot is undervalued and is a Buy.

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