Can Another Retailer Follow The Best Buy Playbook
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Can Another Retailer Follow The Best Buy Playbook In 2014?
Best Buy went from dying to dynamo in 2013, but odds are low that another retail basket case will match its move in 2014. (AP Photo/David Tulis)
[b][url=http://www.makemkv.net]watches[/url][/b] ‘Tis the season, when holiday sales are in the air and investors are itching to pick winners and losers in the retail space.
[b]<a href="http://www.makemkv.net">best replica watches site</a>[/b] The fallout from Black Friday and Cyber Monday has already claimed some scalps – Express Express plummeted after warning that promotions will limit profits – and handed out some halos – JC Penney JC Penney drew a (short-lived) cheer with its best monthly comparable sales in years. But really the last month of the year is a stressful time for both the stores and the stocks.
[b][url=http://www.makemkv.net]swiss Mechanical movement replica watches[/url][/b] Take Best Buy Best Buy . A year ago, the electronics retailer seemed to be at death’s door. Sale prospects were dim and expectations were that a soft holiday season could be the final nail in the coffin.
[b][url=http://www.makemkv.net]swiss watches[/url][/b] Fast-forward 12 months and the stock is the second-best performer in the S&P 500 this year, up some 250%, and the rebound has scared off short sellers even though its financial results have not improved nearly as rapidly.
[b][url=http://www.makemkv.net]swiss replica watches[/url][/b] Best Buy’s comeback is a beacon of hope for other struggling retailer’s, but very few will enjoy the same fate.
[b][url=http://www.makemkv.net]copy watches[/url][/b] For everything that was going wrong inside of Best Buy’s stores, the market environment outside has been exceedingly friendly in 2013. Retail and consumer IPOs have been hot, stocks at large are enjoying their best year in over a decade and even issues like a government shutdown this fall did nothing to derail the rally.
All that helps explain why Best Buy has tripled even though it is still grappling with the challenges of a retail turnaround. While 2014 may be another winning year for equities, few expect it to be as explosive, which will be a hurdle for any retail stock looking to repeat Best Buy’s trash to treasure revival.
JC Penney may have looked like a tempting possibility after the department store chain touted a 10.1% increase in same-store sales for November. Though the increase was likely thanks to hefty discounting, positive comps is a critical element in buying the retailer time as it moves on from Ron Johnson’s failed effort to remake its image.
A brief rally was cut short though, and the news since has not been good. Hayman Capital’s Kyle Bass told Bloomberg his hedge fund has fully exited its stake and the company also revealed a SEC inquiry into its September capital raise, which came shortly after CEO Mike Ullman dismissed talk of the need for more capital .
The challenge in betting that retailers are doomed is that they tend to go bankrupt very slowly, then all at once. So a key component to the recipe for a big comeback is liquidity. JC Penney may be in decent shape thanks to the September capital raise, but even positive comps from a poor 2012 holiday season might not be enough to change the mood around the chain.
Shares of Penney, currently fetching $8.56 apiece, are off their lows but still down 57% for the year.
“Nobody gets shut down before the holiday season is concluded, but for a retailer in trouble the wheels are in motion after Thanksgiving,” says Steve Strom, global head of restructuring and recapitalization at Jefferies. “Funding-wise it’s the busiest time of year and everybody watches Black Friday weekend like an election primary.”
That primary was a modest positive for JC Penney, but the retailer still has much to prove if it wants to be the Best Buy of 2014.
Michael Kao, founder of hedge fund Akanthos Capital Management, owned Best Buy shares last fall, but pulled the plug on the trade near the lows. He notes that given the substantial short interest in the stock, it didn’t take much in the way of good news to provoke a rally.
According to data from Markit, short interest in Best Buy last year was up to 45% of shares outstanding, a figure that has come crashing down to less than 5%.
Mindful of having thrown in the towel too early on Best Buy, Kao and his team went hunting for other opportunities and landed on an arbitrage play in RadioShack. The initial effort resulted in a loss, but the Best Buy “fish that got away” stuck with him and when shares of RadioShack fell to $2 he bought back into the common stock.
Knowing there was heavy short interest, Kao figured he could lend the shares out for a tidy return that would only move against him if bankruptcy risk appeared imminent. Without any near-term maturities he thought that was remote, and still owns the shares after taking some profits around $4.
Blow-ups are damaging, Kao says, “but recoveries can be equally as explosive” and he thinks the 33% gain in RadioShack this year could just be the beginning. (See “RadioShack Rocked By Q3 Loss.” )
Another element in the Best Buy saga was the prospect of a buyout. It never materialized, but for some other retailers scuffling this year a private takeover may be the most likely path for a stock bounce.
Shares of Abercrombie & Fitch have lost 30% this year as the company’s sales have slowed and CEO Mike Jeffries has come under fire for insensitive remarks regarding his preferred types of customers. The board ignored an activist investor’s call to say goodbye to Jeffries , inking the executive to a new contract.
Mark Spellman, portfolio manager of the Value Line Income & Growth Fund, thinks that both Abercrombie and its teen apparel rival American Eagle Outfitters American Eagle Outfitters could be prime LBO candidates.
“They’re on our radar,” he says, though he is not optimistic for holiday season results and will wait for a shakeout in January before buying. “The stocks are broken, but fixable,” he adds, and the possibility of a buyout is a part of any bullish case.
“I’m not jumping in ahead of Christmas, but bad numbers could make them interesting.”
As a value investor, Spellman’s play is to bet on multiples expanding, which means pickings aren’t bountiful after a year in which the broader market multiple has risen back above long-term averages. Scuffling retailers though, tend to be rewarded with improved multiples if they can show a turn in same-store sales results, so getting in ahead of that turn can be lucrative.
One name Spellman has been waiting on is Target Target . The low-price chain is up 7% in 2013, well behind the broader market and rival Wal-Mart’s 16% advance. He won’t commit more until after the holiday numbers land in January, but he thinks a turnaround in the company’s Canadian business would be a big benefit to earnings and appreciates that the company has managed 20% dividend increases for two years running.
It’s a 12-18 month story and won’t repeat the Best Buy miracle, but in a market where much has become richly valued, Target at a bit more than 13 times 2014 earnings estimates qualifies as a cheap retailer that should reward patience.
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