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Stocks  | July 4, 2019

If you own either Nordstrom (NYSE:JWN) or Gap (NYSE:GPS) stock, you wouldn’t have enjoyed reading CNN Business contributor Paul La Monica’s June 28 article. 

La Monica informed his readers that these two retailers were the worst-performing S&P 500 stocks through the first six months of 2019. They were not the stocks to buy in the first half of the year. 

The article goes on to highlight other brick-and-mortar retailers that struggled in the first half of the year due to poor sales and profits. 

How have the retail ETFs done so far in 2019 compared to the S&P 500?

Not well. 

While the broad market S&P 500 ETFs were up almost 20% in the first half of the year, the top retail ETFs by assets under management (AUM) have generated between half and one-quarter the returns. 

However, just because a group of stocks has under-performed in one period doesn’t mean they will under-perform in another. 

For those who believe retail stocks will make a comeback in the second half, here are the seven stocks to buy that are down, but not out.  

Simon Property Group (SPG)

As retail stocks go, Simon Property Group (NYSE:SPG) is faring much better in 2019, although it’s still down for the year. 

With retail stocks doing poorly, the focus falls on SPG and whether it can transform its malls into experiential palaces rather than moribund ghost towns where retailers go to die.

However, as Greg Andrews of the Indianapolis Business Journal wrote about the mall owner recently, SPG “racked up annualized total return of 14% a year, far better than the 9.6% posted by the S&P 500” since going public in 1993. 

It’s got staying power despite living through several market corrections as a publicly traded company. Plus, let’s not forget that SPG stock has gone sideways the last five years while the index has gone on a tear. 

For me, the creme always rises to the top. 

CEO David Simon has been busy putting together a better mix of tenants that resonate with shoppers. Andrews highlighted the fact that Simon is making about 27% more from rent when it replaces an under-performing tenant with a newer, more appropriate one for today’s changing retail climate. 

Despite the fact investors see brick-and-mortar retail doing poorly, Simon’s evolution of its real estate ensures that the future is brighter than most people think.

As Mark Twain said, “Buy land. They’re not making it any more.” SPG is a long-term buy.

Stocks to Buy: Kroger (KR)

It’s been a mixed bag in 2019 for grocery store chains. Some are up while others, such as Kroger (NYSE:KR), the nation’s largest publicly traded grocery store, are down.

It seems investors continue to be worried about Amazon (NASDAQ:AMZN), Walmart (NYSE:WMT), and even Target (NYSE:TGT). They shouldn’t be. 

Despite Jeff Bezos claiming all kinds of changes would happen under Amazon’s leadership, little has changed at Whole Foods in the two years since Amazon acquired the high-end grocery store. 

In fact, if investors take a closer look at what Amazon has done with Whole Foods, they will realize that it’s not the great emancipator everyone says it is. 

“Food seems to be a category that keeps bedeviling Amazon. It said last week it will close its 4-year-old restaurant food delivery operation in the U.S., an admission that it had been outgunned by Grubhub, Doordash and Uber Eats,” wrote Los Angeles Times contributors Sarah Halzack and Shira Ovide on June 16. “It earlier pared back the footprint of its 12-year-old Amazon Fresh grocery-delivery service, which struggled long before Whole Foods was in its tent.”

The fact is, Kroger’s transformation continues to deliver long-term benefits for the grocery store chain. These benefits include cost savings, real-time data analysis, alternative revenue streams, and higher online sales. 

In just five years, for example, it will have grown digital sales from nothing in 2014 to $5 billion in the coming year. 

In five more years, I’m confident that Kroger will be a different company from the one you see today. From where I sit, that’s an excellent thing. 

Kohl’s (KSS)

The second quarter was Kohl’s (NYSE:KSS) worst quarter in the markets since 2001. You can now buy its stock for the same price you would have paid in November 2017. Yet, the retailer has more revenue and operating profits than it did two years ago. 

According to Miller Tabak equity strategist Matt Maley, the punishment dished out to KSS shareholders is overdone. 

“Its weekly RSI chart is quite oversold and that one could be due for a bounce, one that could last more than a couple of days,” Maley said June 28 on CNBC. 

Kohl’s has been hit by weak sales so far in 2019. This has forced CEO Michelle Gass to lower its earnings per share guidance for the fiscal year from $5.98 (midpoint of estimate) to $5.30, an 11% cut to the bottom line. 

However, now that KSS has rolled out Amazon’s return program nationwide and launched in-store initiatives, the outlook for the second half of the year is much brighter. 

The company has also become more adept at managing its inventory levels at lower-volume stores, helping it keep margins higher at locations that aren’t performing to its standard. It’s a big reason Kohl’s is shuttering Off/Aisle stores, the company’s off-price experiment. 

As I stated earlier this year, I recommended investors continue to watch how Kohl’s partnership with Amazon progresses. Now that it has gone nationwide, I see Kohl’s in-store revenues increasing as Amazon users return goods. 

The partnership has proven to be a winner. Soon, Kohl’s stockholders will reap the benefits. 

Urban Outfitters (URBN)

Business Insider often runs an article where a writer compares two different retail stores to gain a perspective as to why one stock is outperforming another. Recently, Shoshy Ciment shopped at both Urban Outfitters (NASDAQ:URBN) and American Eagle Outfitters (NYSE:AEO) stores in New York City.

Ciment concluded that it was easy to see why American Eagle was dominating its segment of the retail sector. The Urban Outfitters store was in shambles while AEOs was a thing of beauty. 

While I get the Peter Lynch idea of seeing first hand how a business is operating, this exercise fails to consider several reasons why it might not be indicative of the entire picture. 

First, it’s possible that the Urban Outfitters store was in the middle of changing its floor layout, which led to the less-than-desirable optics. Secondly, it’s also possible that the URBN store was in-between managers. Retail has tremendous turnover, which often leads to terrible-looking stores while a team is understaffed. I could go on. 

The point is, you shouldn’t surmise that one unsightly store is indicative of a poorly-performing stock or company. The opposite also holds. 

While it’s true that AEO stock isn’t doing nearly as poorly as URBN stock in 2019, they’re both in the red year-to-date. Though AEO’s Aerie line is killing it, shareholders should be concerned that it still can’t deliver positive returns.

That said, Urban Outfitters’ three brands: Urban Outfitters, Anthropologie, and Free People, have seen a slowdown of sales in recent quarters.

However, from a value perspective, if you back out the company’s $637 million in cash and marketable securities (it has no debt), you get an enterprise value of almost $1.7 billion. In the trailing 12 months ended April 30, Urban Outfitters had $290 million in free cash flow, for an FCF yield of about 17%, putting it easily within the value category. 

Genesco (GCO) 

These last three retail stocks to buy all come with significant warts, so do your due diligence before purchasing any of them.

The recent hiring of Mel Tucker as Genesco (NYSE:GCO) CFO suggests to me that good things are just around the corner for the Nashville company. Tucker’s got extensive experience in the retail industry, most recently serving as CFO at the iconic New York City department store, Century 21. 

Genesco is transforming into a footwear retailer. In December, it sold off its Lids stores for just $100 million. The sale allows CGO to focus on shoes and generate some cash it could reinvest in its Journeys business, which produced 7% same-store sales in the first quarter ended May 4. That’s on top of 6% same-store sales growth in the same quarter a year earlier. 

In the first quarter, Journeys generated about 65% of Genesco’s overall revenue and a big chunk of its total operating profits. Overall, Geneco’s adjusted EPS was $0.33, almost 136% higher than a year earlier. 

As a result, it expects to generate EPS of $3.55 in fiscal 2019. At a current price of $41, GCO stock is trading at less than 12 times those earnings. With net cash of $83 million and free cash flow of almost $157 million, GCO stock is worth a closer look.    

Michaels (MIK)

The crafts retailer is your typical private equity horror story. 

Michaels (NASDAQ:MIK) was taken private in 2006 for $6 billion by Blackstone Group (NYSE:BX) and Bain Capital (NYSE:BCSF). After weathering the financial crisis, it was finally ready to go public in 2012. Unfortunately, the CEO had a stroke and the IPO was postponed until June 2014 when it raised $473 million selling shares to the public at $17 apiece.

Trading at less than half its IPO price, MIK stock continues to struggle with internal and external issues, the most recent being investor concerns about the company’s debt. In May, Michaels refinanced $500 million of its 5.875% debt at 8%, a sign that investors are worried about how the U.S. tariffs will impact a company reliant on Chinese imports. 

Before Michaels was taken private, it had no debt and $452 million in cash on the balance sheet. After the takeover, Michaels had $3.7 billion in debt and just $30 million in cash.

The private equity owners used its sound financial standing to get almost $4 billion in loans to pay for its acquisition. At the end of the quarter Michaels had $2.7 billion in debt, $246 million in cash, and $5.2 million in annualized revenues.

Why do I think you should buy it?

Someone will come along to take it private, slap a coat of paint on it, and take it public for a second time in less than a decade.

Buckle (BKE)

Buckle (NYSE:BKE) was a darn good stock and decent retailer to boot before it went into the toilet. Buckle now has a market cap of just $811 million, well below where it was trading at its height in 2015.

However, despite having negative same-store sales for the past four years, BKE continues to make money, which is what ultimately drives stock prices higher. 

Back in 2015, Buckle was generating sales per square foot of $459. Today it’s down to $334, or 37% lower. On the positive side, it has no debt, a working capital of $280 million, and has paid out $14.02 in regular and special dividends over the past five years. 

From a free cash flow perspective, Buckle’s got $110 million for an FCF yield of 11.7%, also in value territory. 

If you’re looking to capture a little income and aren’t so concerned about capital appreciation, Buckle stock is a diamond in the rough. And who knows, it might figure out how to grow again.

A revolutionary initiative is helping average Americans find quick and lasting stock market success.

275% in one week on XLF - an index fund for the financial sector. Even 583%, in 7 days on XHB… an ETF of homebuilding companies in the S&P 500. 

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