The magnitude of the debacle at Best Buy during December was not something Wall Street expected. Most firms had fallen in love with the story, and Best Buy was seen as the proverbial Phoenix rising from the ashes. While most Wall Street firms kept their Buy ratings, they lowered their price targets. The damage was done for those long the stock, and a lower price target is meaningless for those that got hammered.
What we were interested in was the Wall Street reaction to other high-flying retail names. So far in 2014, the consumer discretionary sector of the S&P 500 is down 2.11% year-to date. That seems to indicate that portfolio managers at mutual funds and hedge funds may be shedding the stocks that acted so well last year. We combed through our Wall Street research to see if there were indeed other high-profile retail names that may be in trouble.
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Abercrombie & Fitch Co. (ANF) was mocked by the Motley Fool as having perhaps one of the worst CEOs of 2013 in Mike Jefferies. In the third quarter of 2013, Abercrombie & Fitch generated net revenue of $1.03 billion, falling 12% from the $1.17 billion generated in the third quarter of 2012. Much of that drop was the result of a 14% fall in overall comparable sales. Investors are paid a 2.2% dividend. Merrill Lynch has an Underperform rating on the stock and a $30 price objective. The Thomson/First Call estimate is at $38.90. The stock closed Friday at $35.41.
Buckle Inc. (BKE) is a name that short sellers have always circled on the belief that same-store sales comparisons were out of line with general trends. On Dec. 10, Buckle announced a $1.20-per-share special dividend and a 10% increase in the company's regular payout payable on Jan. 27, reflecting management's faith in the company's well-being. Investors are paid a 1.7% regular dividend. The shorts have always argued that the company pays out way too much in the competitive retail environment. Merrill Lynch has an Underperform rating on the stock and a $42 price target. The consensus target is $48.09. The stock closed Friday at $46.02.
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Coach Inc. (COH) is a name that Cowen is skeptical about. Their proprietary survey data for December was quite disheartening, indicating erosion in preference for Coach and its products among key consumer segments, which supports the Cowen view that company's turnaround remains quite challenging. Investors are paid a 2.4% dividend. The firm has a Market Perform or hold rating on the stock, and a price target of $55. The consensus estimate is posted at $57.93. Coach closed Friday at $52.56.
J.C. Penney Co. Inc. (JCP) would seem an odd short to some, given the huge price decline already. The main question is does the company ultimately go bankrupt and out of business? It announced it was closing 33 poor-performing stores and cutting 2,000 jobs. You cannot really blame them for this latest announcement. The company needs to keep the coffers filled enough to keep the lights on, and that means trimming the fat. The problem is, there is no bone in this beast -- it is all fat. What many on Wall Street are starting to believe is that plain and simple, the company is out of ideas, and worst of all, the consumer does not care anymore. J.P. Morgan has a Neutral rating on the stock and a $6 price target. The consensus number is set at an optimistic $9.13. J.C. Penney closed Friday at $6.52.
Nordstrom Inc. (JWN) is another high-end retailer that may be poised to rollover. Merrill Lynch lowered its 2013 and 2014 earnings per share estimates to $3.66 and $4.00 from $3.67 and $4.04 to account for higher net interest due to the issuance of $700 million of new debt partly offset by the tender of the 2038 notes (in early January 2014). While the company has performed better than most, it may be fully valued at current levels. Investors are paid a 2% dividend. Merrill Lynch has an Underperform rating and a $55 price target. Consensus stands at $65.09. Nordstrom closed Friday at $59.93.
Target Corp. (TGT) may have dealt itself a public relations blow that could take years to be forgotten. During the height of the holiday shopping season, it disclosed that 40 million customer accounts had been hacked and compromised, with some even having their PIN numbers revealed. Reuters recently reported that an additional six large U.S. retailers have reported compromised customer accounts. Investors are paid a 2.7% dividend. Merrill Lynch is unimpressed and has an Underperform rating and a $55 target. The consensus is at $66.50. Target closed Friday at $60.24.
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Ralph Lauren Corp. (RL) has been a retail momentum stock for years and could also have a day of reckoning. Analyst Jay Sole of Morgan Stanley recently assumed coverage of the company and downgraded it to Equal Weight. He noted in his report that the company's predictable earnings growth since the mid-2000s was helped by retail growth, license buybacks and infrastructure investments, but the categories are slowing down. Investors receive a 1% dividend. While the J.P. Morgan price target of $170 is above current levels, any misstep like Best Buy showed and investors could flee in droves. The consensus price target is much higher at $195. Ralph Lauren closed Friday at $162.49.
Wall Street was in love with Best Buy until the horrific December numbers. That shows investors that any big story that loses its luster can be pounded unmercifully. While many expect the economy to improve this year, the numbers for retail can always go either way, depending on consumer tastes and perceptions of the brand. Those not wanting to actually short stocks may want to thin out their retail holdings and seek sectors with better upside for 2014.
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