Consumer Products

Retail & Consumer Stocks That Should Double (ANF, M, SHLD, SONC, WFMI)

This week 24/7 Wall St. is picking several stocks from major sectors that are likely to double off of their lows we have recently seen. Today, let’s discuss the retail sector.   We are also including two food companies that have suffered along with the rest of the retail sector.

Today’s review includes Abercrombie & Fitch Co. (NYSE: ANF), Macy’s, Inc. (NYSE: M), Sears Holdings Corporation (NASDAQ: SHLD), Sonic Corp. (NASDAQ: SONC), and Whole Foods Market, Inc. (NASDAQ: WFMI).

Calling for a double in the troubled retail and consumer discretionary spending sector may sound lofty, but some of these stocks have already moved sharply off of their lows.  As far analysts’ estimates, we are only using those as guesses.

The time frame for these to double off recent lows is by the end of 2010, which is meant to coincide with some form of economic recovery next year.  This is not based on a sharp turn up in the economy. A number of the credit and financial issues facing the markets will be in place for the near-term or longer.  The other assumption used for choosing the stock prices is a market bottom of roughly 600 on the S&P 500 Index.

Abercrombie & Fitch (NYSE: ANF) has a product line somewhere in between Gap and Urban Outfitters, with the difference being that the kids aren’t embarrassed to shop there. A&F also has a diverse product line that isn’t dependent upon $200 jeans.  There is one issue that could make the company decide to go for compressed margins at the expense of sales.  Same store sales were down about 30% last month and the company’s earnings last quarter were down almost 70%.  The scary part of this is that it is essentially a new company every 4 months and with a fickle buyer.  But despite the lowered earnings estimates it is still expected to see a gain of 15% for “calendar 2010” to $2.24.  If those sales numbers stabilize then this could easily come in higher.

The company refused to offer guidance other than “volatile sales expected,” but the balance sheet here looks strong enough that it can weather quite a nasty storm.  This stock traded under $14.00 at the end of last year, but we are using a base of just under $17.00 for that real “bottom pivot” point.  A double to $34.00 would still be less than half of its shares prices north of $80.00 back in 2007 and 2008.

Macy’s, Inc. (NYSE: M) has been far from immune to the economic slowdown.  This is Joe Public’s department store, at least in the cities, as it isn’t geared to the lower-end consumer or the high-end consumer.  Analyst expectations are for $0.53 EPS for 2009 and $0.87 EPS for calendar 2010.  A doubling of the stock still keeps this valuation around a forward P/E of 15.

The estimates for 2009 have almost been cut in half for this year and cut almost by one-third just in the last 60 days.  The lower cap-ex and store closures will keep revenue depressed, and we won’t be shocked if there are more layoffs this summer.  Macy’s got three analyst upgrades last week. A year ago this was a $25 stock, and it was a $40 stock two years ago.  Macy’s went as low as $5.07 at the end of last year and a double to $10.14 wouldn’t be that big of a call.  But in recent days this got under $6.50 and was using $6.75 as its pivot point.  So our double would be from that pivot point to $13.50.

Sears Holdings Corporation (NASDAQ: SHLD) has proven that it can be an atrocious retailer.  But the last earnings report might lead some to believe that the worst is over on a “relative performance basis compared to peers.”  Its cash balance has been cut, but it has also slashed its debt levels.  It can be criticized that it keeps using cash to buy back stock.  It hasn’t helped the stock. The domestic same store sales last quarter were down 11% at Sears and 5% at Kmart.  It has been cutting back on its inventory levels, a key for retailers saving cash, by a tune of 12% year-over-year for the last quarter.  With a market cap of $4.5 billion at $37.00, this stock trades at a discount to its past tangible book value.  The wild card here is earnings will be spotty.  Analyst expectations are no help.  But there is an embedded call option since Sears owns a slew of real estate which “was” prime dirt.  It is arguable but there may be another $1 billion or so that could be raised by land sales if and when the economy normalizes.  A doubling from lows would take this to $53.60, but a doubling from the most recent lows would take Sears to $68.00.  That is still about half of its 52-week high of $112.80 and you have to recall that this was almost a $200 stock two years ago.

Sonic Corp. (NASDAQ: SONC) may be one of the more unusual and old-school hamburger restaurant chains in America.  This former darling that has fallen from grace as a stock is a play on suburbia with a drive-in format.  It has also discovered that it really was competing against McDonald’s.  This stocks started tanking as gas prices went through the roof and commodity prices started to skyrocket.  Even after analysts cut estimates by 15% for this year and even more for next year, they stand at $0.85 EPS this year and $1.00 next year.  Our issue with estimates is that revenue are expected to be stagnant this year and next, which analysts derived from hitting a dart board.  Profit has dropped and its same store sales have declined.  But there has been a marginal improvement now that Sonic introduced a value menu, and a family of four can still go eat at Sonic and drive away with their wallets largely unmolested.  We will not be surprised if the  earnings report in two weeks is a disappointment.  But the worst has been seen in our minds.  We would normally be harping on its high debt levels, but the lion’s share of that debt does not mature until after two years from now.  While a technical double from the $5.78 low would be $11.56, we are using the low of Monday’s $6.05 to put a double up at $12.10.  This was a $10 stock just a month ago and that would barely be half of its 52-week highs of $23.33.

Whole Foods Market, Inc. (NASDAQ: WFMI) has almost doubled off of its lows, but we are using higher base levels for our double point.  If you have gone to the organic and high-end grocer lately, you probably notice that it is packed with shoppers.  They might be more selective in what they buy and how much they spend at “Whole Paycheck,” but the company is still selling its healthy and organic foods.  While it is a retail grocery retailer, it is arguably not different than any luxury brand.  We recently featured this in our newsletter when it was under $10.00 (at $8.19), and we are using the recent prices of $10.00 rather than the $7.04 as the level from which we think Whole Foods can double.  This company was hit hard by new competition from Kroger and other grocers at much lower prices.  Even Wal-Mart sells organic food now.  Then the economy took a bite out of its growth plans.  So Wild Oats took out competitor Wild Oats, which we view as solely a competition-killing buyout rather than a real property grab now that the FTC settlement requires so much of that purchase to be divested.

A recent private equity financing package also got its balance sheet back in order. If analysts are accurate in its long-term estimates, a $20.00 share price would give this a lofty P/E ratio of about 25.  That is a bit scary to us right now, but the gumption here is that once the economy starts to improve this one will see an accelerated return of surprises to the upside on earnings.  An almost $20 level is still substantially under its 52-week high of $36.03 and still only about one-third of the share prices back in 2006.

JON C. OGG