Expected Gains in Specialty Retail Stocks (ODP, OMX, SPLS, BKS, CSTR, BID, TSCO, TITN, PETM, LUX)

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The universe of specialty retail stocks is not terribly large, measured either by number of companies or market cap. The entire sector has a market cap of about $310 billion, less than Apple Inc. (NYSE: AAPL) or Exxon Mobil Corp. (NYSE: XOM) alone. The companies represented in this group include pet supply stores, a bookstore chain, a DVD rental chain, office supply stores, a heavy equipment rental chain, an eyewear maker, and an auction house.

The companies we’re looking at include Office Depot, Inc. (NYSE: ODP), Office Max Inc. (NYSE: OMX), Staples, Inc. (NASDAQ: SPLS), Barnes & Noble, Inc. (NYSE: BKS), Coinstar, Inc. (NASDAQ: CSTR), Sotheby’s (NYSE: BID), Tractor Supply Co. (NASDAQ: TSCO), Titan Machinery Inc. (NASDAQ: TITN), PetSmart Inc. (NASDAQ: PETM), and Luxottica Group S.p.A. (NYSE: LUX).

Diversity aside, most of these stocks have very high implied gains, which means either that they are worth a second look or that there is no hope that any will ever hit their targets and that a lower target is soon to come. Which result will occur depends to a large extent on competitors in the same business, the overall economy, and whether consumers regain some of their lost confidence.

All data from Yahoo! Finance, with current prices taken at about noon today.

Office Depot, Inc. (NYSE: ODP) has a median target price of $4.00 from 13 brokers. Shares are trading today at $2.30, for an implied gain of $1.70, or 74%. Office Depot’s forward P/E is 28.5 and the company does not pay a dividend. The stock’s 52-week trading range is $1.75-$6.25, and at today’s price that’s about 31% above its 52-week low, posted earlier this morning, and 63% below the 52-week high.

Analysts didn’t expect much from Office Depot in the third quarter, and the company failed to deliver even that. EPS was break-even compared with an expected EPS of $0.01. Revenue also missed estimates. The implied gain in this stock is purely illusory when you consider its earnings and its immodest forward P/E.

Office Max Inc. (NYSE: OMX) has a median target price of $7.50 from 14 brokers. Shares are trading today at $5.10, for an implied gain of $2.40, or 47%. Office Max’s forward P/E is 7.39 and the company does not pay a dividend. The stock’s 52-week trading range is $3.90-$19.20, and at today’s price that’s about 31% above its 52-week low, posted earlier this morning, and 73% below the 52-week high.

Office Max reported that net income rose last quarter but revenue fell, as a result of cost-cutting measures. The company expects full-year revenue to be flat with last year. The company also plans to continue closing stores. There’s little long-term happiness in store for the company.

Staples, Inc. (NASDAQ: SPLS) has a median target price of $19.00 from 16 brokers. Shares are trading today at $14.69, for an implied gain of $4.31, or 29%. Staples’ forward P/E is 9.58 and the company pays a 2.8% dividend yield. The stock’s 52-week trading range is $11.94-$23.75, and at today’s price that’s about 23% above its 52-week low, posted earlier this morning, and 38% below the 52-week high.

Staples has been rumored as a possible buyer of either Office Depot or Office Max or both. The company’s market cap of $10.5 billion is about 10X the market cap of the other two combined, so such a deal is not out of the question. Staples’ target price is now lower than its 52-week high, a sign that analysts don’t expect a lot of growth. That could either spur the company to go ahead with an acquisition or cause it to sit on its hands.

Barnes & Noble, Inc. (NYSE: BKS) has a median target price of $15.50 from 4 brokers. Shares are trading today at $11.52, for an implied gain of $3.98, or 35%. B&N’s forward P/E is 33.87 and the company pays a huge 8.1% dividend yield. The stock’s 52-week trading range is $10.30-$12.65, and at today’s price that’s about 12% above its 52-week low, posted earlier this morning, and 9% below the 52-week high.

B&N is trying to keep up with Apple Inc. (NASDAQ: AAPL) and Amazon.com (NASDAQ: AMZN) in the e-reader/tablet market. The company is set to announce a new entrant in its Nook device family on Monday. Somehow, taking on the two biggest players in the market with a device that costs more than a comparable device from Amazon and has far less capability than an Apple iPad just doesn’t seem like a long-term winning strategy.