Big Box Retailers: Time to Buy?

Maxwell is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

As we head into the fourth quarter of this year, I thought it would make sense to check in on some of the large retail companies. Many retailers make 50% or more of their profits in the fourth quarters of the year. But with growth sluggish, there have been changes in retail dynamics favoring value-oriented brands, often at the expense of more full-priced sales models.

Target (NYSE: TGT) is America's number two retailer, with nearly 1,800 stores in the United States. Its full month September revenue increased 2.6% from the September of 2011, with a 2.1% increase in same store sales. This represented a slowing over the course of the year, as full year through the end of September Target had same store sales increases 3.9%.

In its most recent quarter (its second quarter of 2012) Target reported profits of $704 million, or $1.06 per share. Adjusted profits came to $1.12 per share, up nearly 5% from adjusted earnings of $1.07 per share last year. The reason for the adjustment from GAAP earnings is costs pertaining to Target's roll out of its new, Canadian retail system, which will not be producing revenue until sometime in 2013. Target has announced an initial footprint of 125 stores across Canada. What is a bit troubling is that in approving Target's application to do business in Canada, the bureaucrats required Target to highlight Canadian products, which isn't a requirement for companies such as Wal-Mart. I suppose if I want maple leaf shaped cookies, Canadian Targets will be the place to go.

Earlier this year Target formed a curious alliance with high-end retailer Neiman Marcus. The two retailers from opposite sides of the proverbial track will be offering a variety of Christmas-themed gifts that will be sold at an average price of $60. Yet it is this sort of dichotomy between being a discount store and a designer store that separates Target from other mass retailers. I look for a nice earnings boost in 2013 as the Canadian stores come online, and the company trades at a reasonable, 1.18 PEG. This is a company that has the makings of a long term holding for most investors.

Home Depot (NYSE: HD) is the country's largest home improvement retailer. While it predictably struggled in the wake of the overall housing collapse, it is recovering very nicely as that market improves. It operates over 2,200 retail stores across North America and China. It also offers a full suite of products over the internet.

In its most recent reported quarter, the second of 2012, Home Depot posted earnings of $1.5 billion, or $1.01 per share. With the aid of a share repurchase program, per share earnings plowed ahead more than 17% above the same quarter a year ago. Revenue in the quarter only advanced on a same store basis by just over 2%, and the revenue dollar amount only increased by 1.7% to $20.6 billion. While the revenue picture was not the best, it sure beat archrival Lowes' second quarter, in which its sales actually fell by 0.4%.

Home Depot management is looking at revenues picking up in the fourth quarter, allowing for annual 2012 sales up 4.6% over last year, and for profits per share to be about $2.95, up 18% from 2011. Analysts see earnings growing robustly over the next five years, averaging 15% annual increases. But Home Depot's stock has roared ahead nearly 70% in the past twelve months, and I believe the stock has gotten ahead of itself with a price to earnings ratio of 22. I think Home Depot is a terrific company, but I would wait for a more attractive entry point before jumping in than is available today. 

J.C. Penny (NYSE: JCP) sells a full line of soft goods, hard goods, and home improvement items. Its business has been something of a train wreck in recent years. As I write this, J.C. Penny's stock is still selling for less than half its price in early 2008, and much closer to its 52-week low than its 52-week high. The problem is one of direction; is the department store chain a typical, “sale oriented” retailer, or an everyday low price chain? Earlier this year, J.C. Penny adopted the everyday low price model, but already seems to be retreating from it. And that, I believe, is what has underpinned the company's recent financial woes.

In the second quarter, J.C. Penny lost $147 million, or $0.67 per share. Adjusted earnings, after excluding costs pertaining to restructuring and other non-core costs, came to a loss of $81 million, or $0.37 per share. Same store sales were down a shockingly awful 22%, and even internet sales fell by nearly one third. Analysts are expecting a far narrower loss, of $0.05 per share in the third quarter. But I do not see anything going on in the company that would suggest a sustained recovery.  Add to that its current PEG of over 3, and this is a company I would rather sell short than suggest buying into. Avoid it.

StockCroc1 has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend The Home Depot. 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.

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