Tuesday, November 24, 2009

What to do with Retail

Today, we saw a big pop in retail stocks. I think that people are really starting to believe that Holiday sales really will be better than expected. In advance of that, we are seeing retail names ramp into the shopping this weekend. Chuck Grom, the analyst at JP Morgan Chase on Fast Money tonight, talked about getting long department stores into Black Friday and then offset it with a discount retailer. We are actually taking on half that trade and bought Grom's name: Macy's (ticker M). Macy's really has tremendous Star Power with the likes of Jessica Simpson, P. Diddy, 50 Cent, and others. I think this ultimately drives traffic into the stores and that should translate into sales this Holiday Season.

Other names that we think are really attractive are True Religion (TRLG) which has nearly $100 million in cash and zero debt; all with double digit margins. Even more, we like Buckle (BKE) because it offers a 2.9% dividend, also with double digit margins. The Buckle does have over $100 million in cash; it's actually $163 million in cash and still no debt. These retailers are very trendy and offer clothes that young people really want to wear. I don't know about you, but I rarely buy new clothes. Who does? Young people buy clothes, because they are worried about how they look (especially when it comes to the opposite sex) so they will continue to wear "what's hot". The other end of retail that should work is the higher end, because those people actually have money to spend...which is what keeps us from buying more clothes! So, you should be able to own BKE and TRLG, as well as a higher end name.

We don't know high end like we know the other segments. And there is no one more popular and knowledgeable than Patty Edwards from Storehouse Partners. In our conversation tonight with Patty we talked about the high end of retail and she felt very comfortable with a couple names. J. Crew was her number one name and she said she is very comfortable owning that name. We also talked for a while concerning the Diamond Market. We took a look at the industry from the bottom where the Diamonds are pulled out of the ground (Harry Winston Diamond Corp. (HWD)) all the way to Tiffany and Company and Blue Nile. Patty said she has personally been able to visit the facilities at Blue Nile and they are a fabulous company that is extremely well run. She said that their follow-up after a purchase is top notch and their customer service is top of the market. We know that companies that provide service to their customers like Chipolte and Panera Bread (which have run up huge). Blue Nile offers everything from a pair of earrings for $38 to a piece of jewelry that cost over $100,000; you can have both at Blue Nile (NILE). Her other name, TIF, is a testament to the high end retailer. She did have concerns about HWD, and we admit that we have them as well. But, we are value investors and $2 downside and $30 upside is a great risk reward for us. They have had a string of rough quarters and are not projected to be profitable until another 3 quarters of losses. So, it will take a surprise turnaround for this company to be profitable. Our time horizon on this is in years, so know that up front. A search for news on HWD also brought MOV out, but this company may just need to be avoided. In fact, Jim Cramer told you to sell it a day or two ago on Mad Money. But, unlike many of the American Companies, the Chinese-based Fuqi International (FUQI)has consistently grown earnings and is projected for each quarter next year to beat those numbers year over year. Plus, their Q4 is seasonable strong each year (thanks to Holiday sales). Of all the Jewelry names, FUQI seems the most dependable, HWD is our idea of a longer shot value play, and Blue Nile (NILE) is a way to play both the rise in online transactions and the return of the consumer to jewelry purchases. You may want to avoid TIF and MOV. We will not have to wait long to see how TIF is doing.

Jim Cramer did a fine job tonight on Mad Money, bringing in the CEO of Phillips-Van Heusen Corp (PVH). Let it be known that they have apparel lines that apparel in everything from Walmart* to Nordstroms. They have outlet stores, are in department stores, and across many lower end retailers. The number show that about 45% of all shirts sold are from PVH and about 50-55% of the neck ware. Those are amazing market shares and can be found in their Calvin Klein, DKNY, IZOD, Donald J. Trump Signature Collection, Kenneth Cole, and (our favorite) Sean Jean. With this lineup, you really get all segments of retail and if you want a retail play...this is good one with $7.16/share in cash. They have already said that if the Q4 goes the way they see it going right now, the'll see meaningful improvement in their margins.

So, the moral of this story, when it comes to retail, you have to own the best. There is no room to own a company that is debt laden, nor one that can't execute. I did have a conversation with a trader today that pointed out that I shouldn't hate Walmart* as much as I do because it has a fabulous online business just like Amazon does. I have been endlessly negative on Walmart* because of it's brick and mortar operations not being able to grow. But, last night, Jim Cramer pointed out that Amazon and other online transactions are only 3% of total retail transactions right now and that in the future, it could be higher, much higher, closer to 30% (not just 3% anymore). So, I'm going to have to take Walmart* out of my Sell Block and tell you that it just may be safe to own Walmart* here on that growth in online retail transactions and the fact that they continue to innovate with their financial services division. They are good executors of their business and that should benefit shareholders going forward.

So, do your shopping for retail stocks before the Black Friday numbers come out and ride it into Christmas. But, we want to let you know that when those numbers come in...if you see your stocks rip...don't be afraid to take some of those profits off the table. We are letting you know now, because we may not get around to telling you when we actually move it off the books. If we get 10% moves in any particular names, that's a great opportunity to pull the rip cord and take home those profits. Heck, then you can go shop at your favorite retail store!