For Part 1, click here.
With gasoline prices soon to be under $2 at a station near you, don't you have to own store-based domestic retailers? You don't want anything to do with Europe in 2015 because quantitative easing without structural change won't mean much. You don't want to have much of Asia, either -- too much of a wildcard. Nope, you want retailers with unassailable, not-easily-knocked-over by Amazon (AMZN) product mixes from the good ol' U.S.A.
Who makes the cut? It's pretty darned eclectic.
First, let's start with an auto retailer CarMax (KMX). I know a used car and truck dealer may not strike your fancy, but cheaper gas makes lower-mileage-to-the-gallon vehicles a better buy and lots of first-time job holders don't want to shell out the cost of a new car when used ones seem to hold up much better than they used to. More important, we need to respect the fact that auto sales in this country are still on the upswing. Yet when you buy a car company you are buying Europe, China and Latin America, and those are all markets that have to be avoided in 2015. Expectations for this company are still too low even after the most recent upside surprise. I like the easy comparisons for the first quarter more than just about any retailer.
So few analysts like AutoZone (AZO), and that's just plain wrong. Sure, the sales have slowed and with it the buyback. But it is still the premier name in the group and the company seems to walk its way higher every single time the stock gets hit on a disappointing quarter. Oh, and if it is that disappointing, how could the stock go to $627 from $476 for the year? As cars last longer, AutoZone's sales increase, and that's just a big-picture trend that's not going away.
CVS Health (CVS) is a remarkable company with a fantastic stock in a very strong group. It would seem you would have missed this one as it traveled to $98 from $68, but I still believe that there's terrific momentum from both its Caremark side and its pharmacy side from the implementation of the Affordable Care Act. I like how it didn't even skip a beat when it dropped tobacco, a real cash cow, for operations like this. I got to meet CEO Larry Merlo this fall and I came away thinking that he's developed one of the foremost health care companies that also happens to be a food and drugstore chain.
It's not easy to discern a winner between Dollar General (DG) and Dollar Tree (DLTR) because I like them both. But I think that Dollar General is in the enviable position of going higher if it gets Family Dollar (FDO), or if it doesn't. This well-run chain still has a lot of expanding to do and it's been a big winner with lower gasoline prices even if the distance is short between most customers and the stores. That's because the percentage of disposable income that goes to the poorer segment of the country is much more meaningful. I like Dollar General's private label strategy, too. But the big deal would be a pick-up of the underperforming Family Dollar, which truly has so much room to be fixed as it has been consistently undermanaged for several years.
It's never an easy choice between a dominant Home Depot (HD) and a resurgent Lowe's (LOW), but I like Home Depot's commitment to its omnichannel strategy. I also think we could be in for an improvement in housing starts this year -- it's hard to get worse -- because of lower rates, and Home Depot will get more than its fair share of contractor business. Home Depot's amazing buyback and its consistent ability to get more dollars out of each store continue to amaze, and all of this at a time when the dollars going to home improvement as a percentage of GDP remains below the historical average. I love Frank Blake, but I think the transition to CEO Craig Menear will be a seamless one.
Can Kroger (KR) possibly beat the percentage gain it racked up last year when it rallied to $64 from $39? I think it can. The company with the best comparable store sales in the food industry -- and that includes Whole Foods (WFM) -- still only sells at 18x earnings. It has the best store-within-a-store natural and organic section and the highest private label penetration. Last year Kroger bought Vitacost, a very successful online vitamin and supplements retailer, and we haven't seen what it would mean yet for Kroger's own online strategy. Look for this initiative to kick in sometime during 2015, maybe even meaningfully so by the second half. Remember, supermarkets are natural winners in a lower gasoline environment.
The mall's dead, right? Tell it to L Brands (LB), the company behind Victoria's Secret, Pink, La Senza and Bath & Body Works, as well as Bendel's. I am continually amazed at the numbers this chain puts up and it is a credit to long-time retail genius Leslie Wexner that he can keep defying the odds, something that helps the stock because the street continually underestimates the comp numbers, which is exactly the genesis of so many upside surprises.
It's never easy to buy a stock after it's had a major move the way Restoration Hardware (RH) has after its last amazing quarter. Some will regard the 22% comparable sales numbers as unsustainable. Others will question if you can maintain a 53% increase in profits. Still others can't get their arms around paying 46x earnings for a relatively unseasoned company. I say forget all that. CEO Gary Friedman is building a retail wonder, a store chain that's just not like any other, that is more of an event, a destination than a retailer. And when customers get to it, they open their wallets like no other. Restoration is offering the most premium home goods for prices that represent real value, an unheard of combination. It's doing so in amazing mansions that, when they open, are more like blockbuster movies, hence the movie poster the company issued when it recently unveiled its Los Angeles store. I think it's important, if you buy this stock, to remember that you are going to be prone to some disappointments. That's the way it is with any retailer that's truly inventive. For example, its decision to mail multiple catalogues at once that weighed a ton backfired. But, frankly, that just set the chain up for a strong finish and easy comparisons ahead. Any company that tears down an incredibly successful edifice, like RH has in Houston, to erect an even better store is one that I can't get enough of the shares. Friedman says it's very early innings for RH and I totally agree, especially when he can use the stronger and stronger dollar to buy the finest goods that Europe has to offer, which is exactly what he is doing. This may be the best strong-dollar play in the universe!
Williams-Sonoma's (WSM) Laura Alber does so many things right and yet quarter after quarter people seemed shocked when she does so. Whether it is the flagship name for kitchen and cookware, or Pottery Barn for furnishings, or West Elm for virtually everything home, you have a triple play for a moment when disposable income's going into making the house more livable. Williams-Sonoma is aspirational; consider it an upscale Bed, Bath & Beyond (BBBY), which is doing incredibly well lately. Williams-Sonoma is non-promotional in two ways: its mild mannered CEO and its prices. What a terrific combination.
I am sure some of you are thinking, "Where's Tractor Supply (TSCO) or Ulta Salon (ULTA)?" The answer: They're good but people want tried and true, not turnarounds at this point in the cycle, although I think both can be bought. How about Costco (COST)? Shocker, at 71% U.S. it doesn't have enough domestic. Anyway, you don't want to force things. I've selected a real barbell approach, with companies that do well when the lower and middle classes save big on gasoline and companies where the rich are feeling flush because of their stock market winnings and higher, more-certain salaries. It's the correct combination for the right time.
