Retail Duo: Shopping for Value

06/15/2016 7:00 am EST

Focus: STOCKS

John Buckingham

Editor, The Prudent Speculator

We buy only those stocks we find undervalued relative to their own trading history, those of their peers or that of the market in general states John Buckingham, editor of The Prudent Speculator, who highlights two leading retailers.

Foot Locker (FL) is an athletic footwear and apparel retailer, operating 3,396 stores in 23 countries; its format includes Foot Locker, Champs Sports, Kids Foot Locker, Lady Foot Locker, Eastbay and Footlocker.com.

Shares are down 15% this year as the overall pressure on the retail industry and concerns over recently softening basketball shoe sales have taken their toll.

While changing consumer preferences and growing online competition are perpetual issues, the company just turned in its most profitable quarter in its history.

We believe the recent sell-off is overdone; we think FL will continue to benefit from its strategic cost control and productivity plans, in addition to further penetration of its apparel offerings and solid growth of digital shopping.

Additionally, we like the strong balance sheet that sports $6.85 of net cash per share, giving management operational flexibility and the ability to buy back shares and increase the dividend (yield is 2.0%). FL also trades at 12 times consensus forward earnings estimates.

Target (TGT) is one of the largest domestic discount retailers, operating 1,793 Target and SuperTarget stores.

TGT earned $1.29 per share in the 1st quarter of fiscal year 2017 (vs. $1.19 est.) on sales of $16.2 billion (vs. $16.3 billion est.), but improvement of the operating margin was offset by lower revenue and lower same-store-sales comparables.

Though management reaffirmed full-year EPS guidance of $5.20 to $5.40, investors were disappointed.

The company expects to refinance high-cost debt by issuing 10- and 30-year bonds at “very attractive” rates, ultimately saving $5 million to $10 million per quarter.

Despite and because of the recent downturn in the stock price, we remain fans of Target as the shares are trading for 14 times forward earnings and yielding 3.3%.

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By John Buckingham, Editor of The Prudent Speculator

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