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Retailers: Big Box to Boutique

11/24/2014 7:00 am EST


John Buckingham

Editor, The Prudent Speculator

We continue to argue that stock valuations, on average are reasonable within the context of extraordinarily low interest rates, explains value investor John Buckingham, editor of The Prudent Speculator. Here, he highlights a pair of retail stocks from low-end to high-end.

Paltry current yields on money markets, treasuries, and even many corporate bonds provide far less competition than in years past for the generous dividend income available in the equity markets.

Coach (COH)

Coach is a leading specialty retailer positioned in the appealing affordable luxury segment of the retail market. COH is best known for accessories (especially handbags).

The shares have been hit hard this year, down more than 40%, as continued operational headwinds in North America and a new competitive landscape have taken their tolls.

There is little doubt that a successful turnaround will take time, capital, and cash flow, but we think it achievable. Also, we were pleased to hear that early reads on new products are in line with the company plan and that they are receiving positive responses across price points.

We continue to like the debt-free balance sheet, the relatively strong global brand with loyal customers and the momentum in new geographic markets. We expect earnings to bottom in 2015 and we are buoyed by the 4% yield.

Wal-Mart (WMT)

Wa;-Mart shares have been relatively range-bound this year as higher healthcare and operational improvement costs, e-commerce investments, and competition have shackled growth.

We like the long-term prospects of the world’s largest retailer and are constructive on its recent efforts to ramp up its online presence.

Additionally, the majority of new store formats will include fresh food, fuel, and pharmacy, which should support store traffic and boost same store sales comparables.

We also like the smaller Neighborhood Market and Express concepts, and their potential to help penetrate historically under-represented urban areas.

Though concerns over near-term domestic sales will persist (the company last month lowered its current year top-line growth forecast to +2 to +3%), WMT could benefit from recent reductions in gasoline costs for consumers.

Wal-Mart sports a solid balance sheet and we appreciate management’s willingness to return capital to shareholders via buybacks and dividend increases. WMT shares offer a current yield of 2.5%.

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