Shopping for Value in Retail Stocks: 4 Favorites After Earnings

We focus on buying undervalued stocks and holding them for three to five years in order to reach their full potential, explain Chris Quiqley and Jason Clark contributing MoneyShow.com and editors at The Prudent Speculator, a value investing newsletter first launched in 1977. General merchandise discount store chain Target Corp. posted earnings per share of $1.53, versus the $1.44 estimate, in fiscal Q1 2020. TGT had sales of $17.6 billion, versus the $17.4 billion estimate. The shares rose more than 10% after the release, as investors cheered better-than-expected comparable sales growth (4.8% vs. 4.3%), better-than-expected fiscal Q2 EPS estimates ($1.61+/- $0.10 vs. $1.60), and 4.3% transaction growth. Said CEO Brian Cornell: We saw strength across channels in the first quarter. Store comparable sales were up 2.7%, while comp digital sales were up 42%, adding 2.1 percentage points to the company's comp growth. Added COO John Mulligan: Shipt offers unlimited free same-day deliveries from Target and more than 50 other retailers across the country for a $99 annual fee. There are nearly 100,000 Shipt shoppers delivering orders across the country today. And it's still growing rapidly as we welcome new marketplace partners and expand into new markets. In fiscal 2020, TGT reaffirmed expectations for EPS between $5.75 and $6.05 per share (compared with $5.39 in 2019). We think that Target's evolution has been rewarding both for customers and shareholders and believe the company's delivery options rival (or exceed) the choices offered by competitors. The stock scores highly in our proprietary scoring system and we think the retailer's future looks bright. Our target price for Target, which trades for around 13.4 times next 12-month earnings and yields 3.1%, has been raised to $98. Shares of Foot Locker, Inc. plummeted almost 16% last Friday after the specialty retailer reported fiscal Q1 2020 results that came in below consensus analyst expectations. Revenue for the period totaled $2.08 billion, versus estimates of $2.11 billion, while adjusted EPS was $1.53, compared to forecasts looking for $1.60. The firm delivered 14.8% growth in its digital channel during the quarter with e-commerce penetration, increasing to 15.4% of total sales (up from 13.9% last year). Investors seemed upset about the Foot Locker's same-store-sales growth of only 4.6%, even as management indicated it saw the full-year comparison on track, while expected bottom-line growth is now likely to be in the high single digits, versus previous expectations of a low, double-digit increase. The modest transgressions notwithstanding, we saw the one-day whack to FL shares as very much overdone, especially as the stock had already skidded more than 7% in May prior to Friday's plunge. Foot Locker sports $1.13 billion of cash on its balance sheet and only $123 million of debt. Net cash per share now registers at $8.93, providing plenty of resources to right-size and grow the business. That in mind, during the first quarter, Foot Locker opened 14 new stores, remodeled or relocated 13 stores, and closed 34 stores. As of May 4, FL operated 3,201 stores in 27 countries in North America, Europe, Asia, Australia, and New Zealand. In addition, 119 franchised Foot Locker stores were operating in the Middle East, as well as 10 franchised Runners Point stores in Germany. We still see Foot Locker offering desirable upside to patient long-term investors. We are constructive on the continued work to become a more well-rounded omni-channel retailer. We think the digital channel still holds a lot of opportunity and we have been pleased to see the growth, but it doesn't come without investment (via digital add spend with platforms like Google and Facebook), which will keep some near-term pressure on margins. We also understand in the near-term the company could experience obstacles if the Trump administration decides to expand the tariff list in the current trade dispute with China, where many athletic shoes are manufactured. As Foot Locker and 170 shoe and retail companies wrote to President Trump last week:The proposed additional tariff of 25 percent on footwear would be catastrophic for our consumers, our companies and the American economy as a whole. We continue to like the company's solid cash position and solid execution, though we did nudge our target price lower to $82 for the stock. Of course, with a big, stock-buyback program, the share price discount allows management to repurchase far more shares than initially expected, making our long-term holdings more valuable. FL trades for less than 9 times NTM adjusted EPS expectations and yields 3.9%. After a five-quarter streak of beating bottom-line consensus analyst expectations, family oriented department store operator Kohl's Corp. disappointed investors by posting adjusted earnings per share of $0.61, versus the $0.68 estimate, for fiscal Q1 2020. Kohl's top-line was also below expectations ($3.82 billion versus $3.93 billion). While many were looking for Kohl's to report positive same-store sales growth, the difficult quarter actually resulted in a decline by 3.4%. Weak areas included women's apparel (which was also reported by several competitors) and seasonal products. We believe that Kohl's was aggressive in marketing spend during the quarter to try to improve slow foot-traffic, as competition discounted heavily to get rid of post-holiday inventory. A few bright spots in the quarter were athletic apparel and digital sales, in which the company realized high-single-digit growth. Investors sold shares not just on the quarterly shortfall, but also because management announced it was reducing its full-year adjusted EPS expectations from $5.80 to $6.15, to a range of $5.15 to $5.45. No doubt, the news was not grand, but the stock was taken out to the woodshed, with the shares sinking nearly 20% last week alone. Despite the short-term setback and the potential near-term headwinds blown by the ongoing trade skirmish with China, we continue to like Kohl's evolution and believe there is plenty of upside in the name, especially after what we feel was a very overdone selloff. Our target price for the stock has been cut to $85, but we note the stock now trades for around 9.5 times estimated earnings while yielding 5.4%. Shares of home improvement chain Lowe's Cos., Inc. were pounded last week, falling 12.5% after fiscal Q1 2020 financial results included a bottom-line that came in below consensus analyst estimates. Adjusted EPS for the quarter were $1.22, while analysts were looking for $1.33. On a brighter note, revenue was $17.74 billion, exceeding expectations of $17.64 billion. Additionally, same-store sales growth of 3.5% was greater than forecast. However, Lowe's cost struggle impacted profitability margins in the quarter, including ineffective legacy pricing tools, and changes to the merchandising group. We remind investors that no turnaround is without its share of turmoil, and Lowe's is still a turnaround story (even as the stock has gained more than 33% on a total return basis since late-summer 2017), but we think the Q1 margin-management hiccup was unduly punished this past week. Even looking at the lowest annual estimates provided by Bloomberg, the minimum projections for adjusted EPS stand at $5.50, $6.21 and $6.71 for fiscal 2020, 2021 and 2022, respectively. We continue to believe, as does Lowe's management team, the macroeconomic backdrop offers plenty of opportunity for the company, and we think folks will continue to need repairs and upgrades (for existing homes), and materials and accessories (for new homes). The shares yield 2.4% and our target price now resides at $123.

Shopping for Value in Retail Stocks: 4 Favorites After Earnings

After a tough earnings season for retail stocks, these names stand out for value.

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