Power to the Retailer
Cecil is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Retail is an excellent option to look at around this time. Ideally you’d have to have picked up your shares a little earlier on in the year to make a good margin, but it isn’t too late to look at a few companies that might deliver some good value. Retail is positively affected by the mad December shopping trend brought about the Christmas gifting mania. The retail sector is the best positioned to benefit from the holiday season, and let’s see how some companies will be doing in the near future.
JC Penney (NYSE: JCP) is one stock that you may want to perhaps stay away from during this period. While the stock is currently trading at around $23, close to its 52-week low of $19. This may seem like a good time to pick up stock if you’ve always dreamed of owning stock in the company or something like that. But if you’re a rational investor, there’ll be certain things about the company that may make you think twice, if not scare you away entirely.
The company has a highly leveraged balance sheet, with about $888 million in cash and cash equivalents, while it has $3.1 billion in long-term debt.The company's leverage ratio has increased to 46% in July 2012 versus 40% in July 2011. The company does have $1.3 billion in available capacity in its credit revolver. An increasingly competitive environment already exists for the company with stores such as Macy’s and Target offering similar or even better products at comparable prices. The high level of competition may lead to a problem with regards to the fact that any restructuring will be difficult to do considering the company’s cash to debt ratio. A retailer like J.C. Penney requires a complete restructuring, which will have to consist of a change in product line, competitive pricing of products, a strong balance sheet, and a management with a fresh look at the business, and the industry.
Meanwhile, Barnes and Noble (NYSE: BKS) is trying incredibly hard to keep up with the market. The challenge that the book retailer faces is two-fold. One, how does it address the need to stem declining book sales. Two, how does the company ensure it has a vast repository of content to compete with the likes of Amazon in the digital market. In terms of availability of content, the company seems to be a few years behind leaders such as Amazon, Google and Apple. However, a recent Wall Street Journal report said that the book division is still profitable and the Nook is holding out against established players including the iPad. The company dominates the book market, with nearly 64% market share after Borders went out of business. Nook Media, a newly formed division of the company, includes Nook and the company’s profitable college division, which operates bookstores at 667 campuses across the company, including Yale University and Boston University.Barnes & Noble has begun to look like an overlooked stock. While it has been beaten down by concerns that Amazon will drive its margins to zero, the company sells for close to what its retail business is worth alone. Furthermore, new Nook devices have received good reviews.
GameStop Corp (NYSE: GME) is also another company that seems set to grow quite well. The world’s largest multi platform gaming retailer has some good ideas to tap into different segments as well. The company will definitely benefit from the new consoles being launched – the Wii U during the holiday season, the PS4 and the Xbox in 2013. The company continues to repurchase shares; last quarter the company bought back $136 million worth of shares, and increased its dividend from $0.15 to $0.25. The company has a fairly solid balance sheet with about $139 million in cash and no public debt. There is a chance that innovation will be limited thanks to the line of business that the company is in, but they have shown intent to come up with innovative ways of selling and reaching out to new segments. Recently, the company announced the launch of GameStop Kids holiday store locations which will be rolled out across 80 malls in the US. The company has a P/E of about 9 and seems to be an excellent prospect for medium-term returns.
Between these three companies, my pick would be Barnes and Noble. The book retailer has shown great promise by entering new markets as demonstrated by the Nook. The Nook is trying really hard to up the quality and quantity of content available to its users and for this the company is tying up deals with Hulu, Grooveshark and most recently – Netflix. The Nook may also be an alternative to the higher priced iPad mini and the good user reviews may push those in favor of picking up a tablet (at a conservative price) towards Barnes and Noble.
ceciljohn2002 has no positions in the stocks mentioned above. The Motley Fool owns shares of GameStop. Motley Fool newsletter services recommend GameStop. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.