Retail Duo: Discounter to High Design

07/07/2016 7:00 am EST


Richard Moroney

Editor, Dow Theory Forecasts

In his small cap Upside Stocks newsletter, quantitative expert Richard Moroney highlights two retailing stocks that have been initiated as buys. One is a deep-discounter; the other is known for its high-end designs.

Deep-discount retailer Big Lots (BIG) operates nearly 1,450 stores in 47 states. It sells a little bit of everything, including food, furniture, and electronics.

Store shelves are stocked largely with products from production overruns, liquidations, or packaging changes.

In May, management raised its full-year outlook, reflecting healthy same-store sales, improving inventory trends, and solid cash flow.

Big Lots has surged 29% this year, compared to the average gain of 6% for general retailers in our universe, based on Quadrix -- our proprietary quantitative rating system.

The stock trades at 16 times trailing earnings, slightly below its peer-group median and about 9% below its 10-year norm.

The consensus expects per-share earnings to jump 15% for the July quarter and 17% for fiscal 2017 ending January.

Sparked by a strong April quarter, estimates are trending higher, as reflected by the stock’s Quadrix Earnings Estimates score of 94. The stock, with an Overall score of 98, is being initiated as a Buy.

A leading maker of designer furniture for home and office, Knoll (KNL) is benefiting from healthy demand and fatter profit margins.

Management aims to gain market share and diversify sales via product launches and growth overseas.

Chief concerns for Knoll include the outlook for corporate spending and demand in Europe, which represented about 8% of sales last year.

Still, the company boasts strong operating momentum, and the shares seem reasonably valued at 15 times trailing earnings.

We dropped coverage of Knoll last November partly because of eroding Quadrix scores and weak sales. Both have since rebounded.

The Overall score is up to 94, reflecting strong scores for Quality (87) and Performance (80). Sales growth has accelerated, reaching nearly 7% in the March and December quarters, versus a 2% decline in September quarter.

For 2016, rising analyst estimates call for per-share earnings to increase 10% to $1.67. Revenue is expected to increase 6%. For 2017, the profit consensus is $1.91 per share, up 14%. Knoll is being initiated as a Buy.

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