Retail Trio: Value and Yield

07/18/2014 8:00 am EST

Focus: STOCKS

John Buckingham

Editor, The Prudent Speculator

This month's featured idea highlights undervalued stocks that actually lost ground over the first half of 2014; here's a look at three retailing plays, suggests John Buckingham, editor of The Prudent Speculator.

Coach (COH)

Coach, best known for accessories and handbags, is a leading specialty retailer positioned in the appealing affordable luxury segment of the retail market.

The shares have struggled mightily this year, down almost 40%, as continued operational headwinds in North America and a new competitive landscape have taken their tolls. Nonetheless, it seems to us that management has a workable plan to reposition the brand.

A successful turnaround will take time; but we think it achievable, given the talents of new executive creative director Stuart Vevers, the debt-free balance sheet, and the momentum in new geographic markets. Coach shares trade at ten times earnings and yield 3.9%.

Kohl's (KSS)

Kohl's operates 1,160 family-oriented department stores which are heavily concentrated in the Midwest and East, but Kohl's is aggressively expanding into the South and West.

We like that Kohl's sales mix is well-diversified and that the retailer has increased sales of higher-margin private and exclusive brands. Meantime, inventories have returned to manageable levels.

We like that management continues to look for creative ways to drive new traffic and increase ticket levels, noting that its stores with revamped and expanded beauty sections are realizing increased sales and margin benefits.

Kohl's has a solid balance sheet and generates an attractive level of free cash flow, which provides flexibility for expansion into new markets, investments in growth drivers such as e-commerce, and the return of capital to shareholders. KSS trades for less than 13 times forward earnings projections and yields 3.0%.

Target (TGT)

Target, one of the largest discount retailers, has been working hard to overcome the controversy surrounding a massive data breach. Losses from its entrance into the Canadian market have not helped, either.

Even so, we believe that new management will rectify the situation in short order. We believe that the changes in both domestic and Canadian operations will meaningfully drive additional store traffic.

Further, we like that Target sold its credit card receivables business last year, strengthening its balance sheet and enhancing return of capital to shareholders. TGT trades at attractive multiples compared to its historical averages and yields 3.6%.

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