Jason Clark is a value-oriented, long-term investing expert and contributing editor to the industry-leading advisory service, The Prudent Speculator. Here, he reviews several buy-rated retail outlets.
Home improvement retailer Lowe’s Cos. (LOW) saw its shares rise 9% following its quarterly earnings release and conference call. While the adjusted results were fine, investors were encouraged by the company’s announced actions to grow sales per square foot, control costs and improve inventory management.
LOW, under the guide of new CEO Marvin Ellison, has undergone a massive overhaul of the “C-suite,” and as a first major move, the company said it would shutter its Orchard Supply Hardware business.
We think these efforts should help better streamline the business and lead to improved operating efficiency over time (and improved cash flow should result from a focus on inventory and cash conversion).
As for the latest quarter, LOW posted earnings per share of $2.07, versus the $2.02 estimate. Revenue for the period came in at $20.89 billion, versus a consensus forecast of $20.81 billion.
Given the cost of winding down Orchard Supply and inventory management initiatives that will be put in place, LOW reduced its full-year adjusted EPS guidance (to a range of $4.50 to $4.60, down from $5.40 to $5.50), though the cut is due to one-time items.
We think that a continued favorable macroeconomic backdrop should bolster the home improvement industry, Lowe’s included, for the foreseeable future. Our target price for LOW has been raised to $125.
Shares of family oriented department store operator Kohl’s (KSS) have been on a roller coaster. While we thought the Q2 numbers were very strong, investors initially sold shares on concerns that gross margins might weaken in the second half of the fiscal year, but seemingly came to their senses concerning results as the week moved on.
For the quarter, KSS earned $1.76 per share, versus consensus estimates of $1.64. Kohl’s had sales of $4.31 billion, compared to a $4.29 billion estimate.
General merchandise discount store chain Target (TGT) earned $1.47 per share in fiscal Q2 2019 (vs. $1.40 est.). The shares climbed following the announcement, reaching all-time highs as shareholders were enthused that the company’s reformatting plan is working well.
For fiscal 2019, TGT expects to earn $5.30 to $5.50 per share, versus the prior estimate of $5.15 to $5.45. And for the upcoming quarter, TGT expects to earn $1.00 to $1.20 per share.
The retailer returned $750 million to shareholders in the quarter via share repurchases and dividends; and expects to make $3.5 billion of capital expenditures for the full year.
While we expect there to be no shortage of competitive and geopolitical headwinds in the future, we think that Target’s strong balance sheet, small stores and large investments in its multi-channel sales network should help solidify its foundation for the future.
TGT shares trade for 16 times forward earnings and offer a just-increased quarterly dividend of $0.64 per share, resulting in a yield of 2.9%. Our target price has been raised to $94.
Luxury home goods retailer Williams-Sonoma (WSM) earned $0.77 per share in fiscal Q2 2019 (vs. $0.68 est.). WSM had sales of $1.3 billion, matching the consensus estimate, and shares soared 16.5% after the company’s earnings beat and guidance raise caused shorts (about 25% at the time, according to Bloomberg) to cover their shares.
Certainly, increasing competition from Amazon (AMZN) and margin pressure aren’t new risk factors for the company, but we continue to smile upon the investments in technology and in sizable WSM’s online presence, and believe those features when paired with exceptional customer service and collaborations with other brands differentiate WSM’s from the rest of the retail world.
WSM has seen a substantial boost from the reduction in corporate tax rate as well as strong consumer demand this year, and we believe that the trends will continue. WSM expects to earn $4.26 to $4.36 per share in fiscal 2019, an increase from the prior range of $4.15 to $4.25. The shares yield 2.4%. Trading for just 16.1 times estimated earnings, our target price for WSM has been hiked to $85.
