Retail Rebounds?

08/28/2014 7:00 am EST


George Putnam

Editor, The Turnaround Letter

When a big-name stock falls short of expectation it tends to get crushed, observes George Putnam. Here, the editor of The Turnaround Letter looks at some of the bottom performers in the S&P index over the past year.

These three retailing stocks all appear to have significant rebound potential for those investors willing to bet against the crowd. They all have solid business franchises and several of them have powerful brand names as well.

Bed Bath & Beyond (BBBY)

The company stumbled in early 2014 when it appeared that the retailer’s growth momentum might be stalling. The retailer had been a general beneficiary of the improving economy and a specific beneficiary of the housing recovery and we expect those trends to resume. 

In addition, management has responded by—among other things—capitalizing on the firm’s traditionally debt-free capital structure and strong cash flow to issue $1.5 billion of debt and add $1.1 billion to the company’s already sizable stock repurchase program.

Coach (COH)

Probably the world’s most recognizable brand in premium leather goods, Coach is seeking to find the right design/price-point combination as it expands the brand into clothing and other accessories.  A new CEO, promoted from within, took over in January, and the company is now transitioning to a new designer. 

The turnaround initiative includes closing some retail locations and moving out old inventory, and so the next quarter or two may offer more disappointing news. 

But expectations have been lowered, as has the valuation of the company, and so any positive surprises should generate significant appreciation.  And with more than three times as much cash as debt, there is little balance-sheet risk.

Target (TGT)

This company was itself the target of hackers last December; some 40 million accounts were compromised.  Sales suffered, as did margins, as Target was forced to offer aggressive discounts just before Christmas. 

Target is also struggling in Canada where it made an acquisition last year.  On top of all that, the rollout of its online and food offerings has been slower than planned. The board fired the CEO in May and is currently looking for his replacement.  

In the meantime, management is taking meaningful steps to stop the bleeding in Canada and improve the rollout of its online offering.  With the privacy issue largely behind it, Target has solid rebound potential.

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