A Value Expert Goes Shopping for Retail Stocks

Several of the nation's top retail chains reported disappointing earnings last week in large part due to higher-than-expected inflation and continued supply-chain challenges. While many investors sold on the news, value-oriented money manager John Buckingham remains bullish for those who share his three- to five-year investment horizon. Here, the editor of The Prudent Speculator and contributor to MoneyShow.com highlights five favorites for value shoppers. Target saw its first quarterly miss since 2018; the report was a doozy, thanks to rising costs resulting in a major profit shortfall. For fiscal Q1 2023, TGT reported revenue around $24.8 billion (vs. $24.4 billion est.), while the earnings per share figure was $2.19 (vs. $3.08 est.). Management explained that despite strong sales and consumer trends, TGT was negatively impacted by capacity constraints in the freight markets, higher transportation costs and other bottlenecks getting inventory to the right places. The net result was inconsistent inventory in stores, especially in product categories that require high-volume storage (e.g. furniture and appliances). Target warned in March's call that quarterly profit performance will be choppy during the year and generally improve as the year progresses, which might feel like a bit of an understatement after seeing Q1 results. Of course, TGT is hardly the only retailer to experience cost pressure and the company must make careful guesstimates to figure out how much of those increases can be passed to consumers without torpedoing demand. We think that balancing act, plus uncertainty regarding inventory timing, will make the next year (or so) challenging, but while we sometimes need to have strong stomachs to endure frenetic near-term trading, our long-term thesis for Target remains very much intact. We think the retailer is among the best in our investment universe, while its finally getting credit for being a stable business vis-à-vis its change from the Consumer Discretionary to the Consumer Staples sector later this year. We think the reclassification will be a positive change because the new peer group by which we calculate our proprietary fundamental score will be more reflective of TGT's competition. TGT continues to remodel stores and enhance store capabilities to support same-day fulfillment services. Management remains committed to returning cash to shareholders via share repurchases, which CFO Michael Fiddelke explained, We entered into an accelerated repurchase plan in the first quarter, which will result in the retirement of up to $2.75 billion of our stock by the time the plan settles in June. And on the dividend front, management plans to recommend that our Board approve a healthy increase in the quarterly dividend, in the mid-teens to low 20% range later this year, keeping 2022 on track to be our 51st consecutive year of annual dividend increases. Our trims of TGT in July 2021 around $253 and in January 2021 around $197 now look well-timed and have resulted in lower-than-target weighting in our broadly diversified portfolios, so we would consider bringing positions back up to normal weight given the massive 29% plummet in the stock price last week. Our Target Price for TGT has been pared to $265. Shares of Walmart plunged nearly 20% last week after the retail behemoth released fiscal Q1 2023 financial results. The consumer bellwether earned $1.30 per share in the quarter ended April 30, a figure that was 12% below the Wall Street target and 23% lower than that earned in the same quarter a year ago, even as revenue growth (2% year-over-year) persists beyond the stimulus-induced bump. Cost pressures from a higher mix of food and fuel relative to general merchandise and a preference for private label food items (particularly categories like deli, lunch meat, bacon and dairy) weighed on gross margins. We suspect some of this was due to seasonal factors as cooler weather persisted longer than usual. These pressures, and a few weeks of overstaffing that boosted wages, led to a 1.25% drop in operating margin year-over-year. Also front and center is a 32% bump to inventory on hand at the end of the quarter, some of which was attributed to inflation adjustments but also a matter of timing from supply chain elongation. Sam's Club and International comparable sales grew 10.2% and 13.0%, respectively. A massive drop for one of our stocks is never easy to experience, and WMT is now well into negative territory on the year. We expect the laundry list of economic obstacles to weigh on profit margins for several quarters, but an inflationary environment that seems likely to drag on ought to exaggerate consumer's thirst for a bargain. Walmart's expanding omni-channel presence, value proposition and defensive characteristics continue to win it a place in our portfolio. High-quality WMT shares trade at 18 times revised NTM EPS estimates and offer a 1.9% dividend yield. Our Target Price has been cut to $168, but we think this a terrific time for those without a position to consider picking up WMT from the discount bin. Caught in the retail-stock carnage, shares of Lowe's Cos. slid nearly 5% last week, even as the home improvement merchant posted 9% growth ($3.51 vs. $3.23 est.) in fiscal Q1 2023 EPS, versus the year-ago period. A gross margin expansion of 74 basis points and modest expense reduction were drivers of the bottom-line strength, despite a 3% contraction of revenue. Lowe's continues to find efficiencies to cut costs through inventory and payroll management, which offset higher logistical costs. Like its peer Home Depot , the company also dealt with a delayed spring season, which affected sales of items like outdoor power equipment, grills and patio furniture. Rapid housing price gains continue to fuel business with Pro customers, which outpaced DIY and grew 20% year-over-year, and 63% on a 2-year basis. Management expects to generate about $98 billion of sales at the midpoint of their range and between $13.10 and $13.60 of earnings per share for the full year. Even as inflation impacts the health of the nation's consumers unequally, we think residential market trends over the past couple of years ought to support demand for home improvement for the foreseeable future. We continue to appreciate the ability of Lowe's management to drive efficiencies to expand returns on invested capital (reaching a record 34.8%) in the prior year. The 28% slide for the stock this year places the forward P/E multiple at 13.3, while the dividend yield stands at 1.7%. Our Target Price for LOW is now $270. Shares of omni-channel specialty retailer Kohl's were down 19%, following the latest quarterly earnings report. While fiscal Q1 revenue of $3.72 billion came in ahead of forecasts, adjusted EPS of $0.11 was far worse than the analyst consensus of $0.57. For 2023, KSS expects revenue to decline in the 0% to 1% range, with EPS between $6.45 and $6.85 (vs. March's range between $7.00 and $7.50). Given the violent share price movements and surplus of KSS publicity lately, it might be surprising to read that KSS has actually outperformed its S&P 400 Consumer Discretionary index this year. Kohl's is down nearly 20% and the index is down 26%, which is nothing to celebrate since investors still have lost money, however KSS's recent performance is not unique. The company has many battles to work through -- activist investor pressure, management changes, inflation and deteriorating consumer dynamics, but we think investors with a longer-term view might find that Kohl's has many opportunities to be successful, whether it is as a stand-alone company or through a corporate action. It's difficult to handicap which buyout stories are credible and which are not, so we are generally excluding them from our long-term expectations, though that may change at any time as new information becomes available. We consider Kohl's to be substantially discounted from its intrinsic value, as is evident by our $72 Target Price. KSS shares yield 5.1%. Despite the extreme pressure on many retail stocks, shares of Foot Locker rose on the back of a solid fiscal Q1 2023 financial release -- though we recognize that the share price still has been almost cut in half over the last year. FL posted adjusted EPS of $1.60, versus the consensus estimate of $1.53, on revenue of $2.18 billion (versus the average forecast of $2.19 billion). While the bottom line number was surprisingly good, the print didn't come without some stiffening headwinds. Q1 comparable-store sales decreased by 1.9% year-over-year, with apparel sales significantly outpacing footwear. Gross margins in the quarter declined by 80 bps YoY to 44.0% while the company spent more on technology and wages. The company also closed 67 stores, opened 24 stores and remodeled 23 for another quarter of net decline in store base. After boosting the dividend earlier in the year and given the pressure on the shares, the current yield sits above 5%. While the balance sheet is still solid, it currently doesn't sport the mounds of net cash per share that it normally does as the company bought back 2.7 million common shares during Q1 (with an average price below $33). We continue to acknowledge that a reduced emphasis on Nike will cause some hiccups, but momentum has been building across shoe labels like Adidas, Puma and New Balance, including an enhanced partnership deal with Adidas that has both firms believing sales of the brand will triple by 2025. Further, apparel sales have been strong of late and new revenue streams from recent acquisitions and investments should be a positive, while more private label offerings should support future margins. Our Target Price for FL has been adjusted to $64. Subscribe to The Prudent Speculator here: https://theprudentspeculator.com/

A Value Expert Goes Shopping for Retail Stocks

Five favorites for value shoppers.

Columnist Conversation

Stocks Under $10

Two Good Signs -- Especially for Small-Cap Investors

More Insider Buying in American Woodmark (AMWD)

COLUMNIST TWEETS

Please Join or Log In to manage and receive alerts.