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Brick-and Mortars
Surviving Retail Apocalypse?

Amid reports that “more than 300 retailers have filed for bankruptcy so far in 2017, and by year end, store closings are projected to hit 8,640 – greater than all the reported closures from 2003 to 2006 combined, according to a report compiled by Fit Small Business.

Investment and personal finance expert Brent Wilsey sheds light on this tumultuous category, including a few retail stocks worth acquiring, two to sit on, and two that would be smart to steer clear of at this juncture as detailed below.

Michael Kors (KORS): BUY – The company is looking to expand its footprint after its recent purchase of Jimmy Choo. This could help increase sales which have been lackluster. They have fallen by 4.6% over the last 12 months and EPS has fallen by 26.8% during the same time frame. Much of the EPS fall can be attributed to accounting for the future closure of several stores. While growth has been a concern the valuation ratios are a major strength. The current P/E of 11.2 is well below the industry average of 29.1, Price/Sales of 1.3 is below the industry average of 1.4, Price/Tangible Book Value of 5.4 is below the industry average of 14.8, and Price/Cash Flow of 7.3 is below the industry average of 13.4. The company also has a great balance sheet with plenty of liquidity. There is a current ratio of 2.06 and debt/equity is just 8.36%. If I look out to March 2019, estimated GAAP EPS of $3.78 would give me a target sell price of $62.37.

Nordstrom (JWN): HOLD – The company sells many great brands through its Nordstrom and Nordstrom Rack stores. The stock price is well off its 52-week high of $62.82 as concerns over Amazon and reduced mall traffic have concerned investors. Even with these concerns, sales have grown by 2.7% over the last 12 months. EPS has not fared as well as it has fallen 23.2% during the same time frame. This could be a result of non-recurring accounting events. With JWN, investors get a nice dividend yield of 3.05%. Price/Sales of 0.54 looks attractive compared to an industry average of 0.89 and Price/Cash Flow of 7.89 looks good compared to the industry average of 8.28. The balance sheet looks concerning as the Debt/Equity of 405% appears to be very high. I felt better about this problem when I noticed the company has a credit business which affects the accounting of the company. If I look out to January 2019, estimated EPS of $3.09 gives me a target sell price of $50.99.

L Brands (LB): HOLD – The company has the well-established store names of Victoria’s Secret and Bath & Body Works. The company pays a great dividend of 5.3% and it uses a reasonable amount of earnings to pay it out with a dividend payout ratio of 62.7%. The current P/E of 12.1 looks attractive compared to the industry average of 18.8 and Price/Cash Flow of 7.99 is favorable compared to the industry average of 8.28. One major concern is the company has equity of negative $836 million and debt of $5.7 billion. If I look forward to January 2019, estimated GAAP EPS of $3.36 would generate a target sell price of $55.44.

Coach (COH): SELL – Coach has a very strong balance sheet with a debt/equity of just 20.5% and a current ratio of 4.35. Sales have grown by 3.9% over the last 12 months and EPS has increased 31.8% during the same time frame. Coach has a strong profit margin of 11.55% which has helped generate a great ROE of 18.88 over the last 12 months. Investors also get a nice dividend of 2.77%. This company has many positives, but the concerns lie within the valuations. The current P/E of 26.36 is below the industry average of 29.1, but is more than I like to pay for a dollar of earnings. Price/Sales of 3.04 is more than double the industry average of 1.38 and Price/Cash Flow of 18.92 is well above the industry average of 13.36. If I look out to June 2018 estimated GAAP EPS of $2.46 gives me a target sell price of $40.59.

Ferrari (RACE): SELL – The company has done a great job growing sales and EPS over the last 12 months. Sales have grown by 11.74% and EPS saw an increase of 47.8% during that time frame. The balance sheet looks concerning as debt/equity of 393% is very high, but much of this can be accounted for in the leasing and financing division of the company. Since it is a luxury car brand the profit margin of 13.7% is well above the industry average of 3.5%, but inventory turnover of 5.0 is less than half the industry average of 10.89. The valuation ratios are a major concern as the current P/E of 38.3 is well above the industry average of 14.1, Price/Sales of 5.23 is far ahead of the industry average of 0.49, Price/Cash Flow of 24.2 is more than 5 times the industry average of 4.69, and Price/Tangible Book Value is not material since the company does not have tangible equity. If I look forward to December 2018, estimated GAAP EPS of $3.18 gives me a target sell price of $52.47.

Disclosure for ALL of the above: Personally Owned: KORS Yes, all others No. Company Owned: KORS Yes, all others No.

Editor’s Note: Brent M. Wilsey is a highly regarded registered investment advisor and a seasoned financial strategist with over 40 years of experience in the field. Wilsey currently owns and operates San Diego-based Wilsey Asset Management (nearly $200 million AOM) through which he offers day-to-day investment guidance to both individual investors and corporations.


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