4 Shopping Center Companies for Your Watch List

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When driving around a shopping center someone could get ideas for investing. It seems that crowds grow exponentially at shopping centers. However, the truly successful investor must go beyond an unscientific gauging of the crowds. Researching the company’s financials to see if it can make money provides essential insight into whether a company will outperform the S&P 500.

On the premises of the majority of shopping centers resides retailing behemoth Wal-Mart (NYSE: WMT). Its more than 10,000 stores gives Wal-Mart an economy of scale that allows it to buy and then sell merchandise cheaper than its competitors. People drive miles past other grocery stores to take advantage of Wal-Mart’s prices.

Wal-Mart’s fundamentals show solid growth in sales, operating income and cash flow between 2008 and 2012 (see table below). The 15% growth in free cash flow resulted in 13% annualized growth in dividends between 2008 and 2012. As of this writing, Wal-Mart’s dividend equates to a 2.3% annual yield and only 55% of its free cash flow.

<table> <tbody> <tr> <td colspan="2"> <p><strong>Wal-Mart growth figures 2008-2012</strong></p> </td> </tr> <tr> <td> <p>Sales</p> </td> <td> <p>4% per annum</p> </td> </tr> <tr> <td> <p>Operating income</p> </td> <td> <p>5% per annum</p> </td> </tr> <tr> <td> <p>Net income</p> </td> <td> <p>5% per annum</p> </td> </tr> <tr> <td> <p>Operating cash flow</p> </td> <td> <p>5% per annum</p> </td> </tr> <tr> <td> <p>Free cash flow</p> </td> <td> <p>15% per annum</p> </td> </tr> <tr> <td> <p>Dividend growth</p> </td> <td> <p>13% per annum</p> </td> </tr> </tbody> </table>

*Source: SEC filings

Wal-Mart’s new frontier includes smaller and international markets. The small format stores represent only 274 of its 10,000 store chain. Wal-Mart plans to open 500 smaller format stores by 2016. The retailer also wants to open 37 Canadian Supercenter stores in the calendar year 2013. Wal-Mart can still expand providing shareholders future growth in stock price and dividend growth.

Generally, the discount variety store Dollar Tree (NASDAQ: DLTR) sits near a Wal-Mart taking advantage of the huge draw the retail behemoth brings in. Dollar Tree’s uniqueness stems from its $1.00 price point. Dollar Tree even sells items in smaller volume to ensure the profitability of the $1.00 price point.

<table> <tbody> <tr> <td colspan="2"> <p><strong>Dollar Tree growth figures 2008-2012</strong></p> </td> </tr> <tr> <td> <p>Sales</p> </td> <td> <p>12% per annum</p> </td> </tr> <tr> <td> <p>Operating income</p> </td> <td> <p>24% per annum</p> </td> </tr> <tr> <td> <p>Net income</p> </td> <td> <p>25% per annum</p> </td> </tr> <tr> <td> <p>Operating cash flow</p> </td> <td> <p>17% per annum</p> </td> </tr> <tr> <td> <p>Free cash flow</p> </td> <td> <p>25% per annum</p> </td> </tr> </tbody> </table>

*Source: SEC filings

In the table above, Dollar Tree’s double digit gains in its metrics stem from expansion into perishables, store size and the number of stores. In the most recent quarter Dollar Tree opened 111 stores bringing the total to 4,630 stores across the U.S.

Concerns about a slowdown in growth and lower than anticipated holiday sales sent Dollar Tree’s stock price into a correction earlier in January. Dollar Tree’s stock price rebounded some recently and still trades at a P/E of 17. Dollar Tree represents a solid long term investment.

In front of a busy Wal-Mart generally resides a McDonald’s (NYSE: MCD). The global restaurant chain backed by 30,000+ stores sells high quality food at low prices. Product innovation and convenience keeps the customers coming back.

<table> <tbody> <tr> <td colspan="2"> <p><strong>McDonald’s growth figures 2008-2012</strong></p> </td> </tr> <tr> <td> <p>Sales</p> </td> <td> <p> 4% per annum</p> </td> </tr> <tr> <td> <p>Operating income</p> </td> <td> <p> 8% per annum</p> </td> </tr> <tr> <td> <p>Net income</p> </td> <td> <p> 6% per annum</p> </td> </tr> <tr> <td> <p>Operating cash flow</p> </td> <td> <p>Not available for 2012</p> </td> </tr> <tr> <td> <p>Free cash flow</p> </td> <td> <p>Not available for 2012</p> </td> </tr> <tr> <td> <p>Dividend growth</p> </td> <td> <p> 17% per annum</p> </td> </tr> </tbody> </table>

*Source: SEC Filings

In the table above, McDonald’s fundamentals also showed solid gains for a large cap company over the past four years. In 2012, McDonald’s growth came mostly from the Asia Pacific at 6%, and in the U.S. growth amounted to 3%. Adverse currency translations caused European sales to decline 1%.

Despite a 3% decline in comparable store sales in the Asia Pacific region, McDonald’s future still lies there. The decline stems from a temporary softness in the Chinese economy. McDonald’s increased the number of stores in China by 17% or 241 versus 0.42% or only 59 stores in the United States.

McDonald’s P/E ratio of 18 and 3% dividend yield, representing approximately 57% of free cash flow, and single digit top and bottom line growth makes it a solid large cap investment.

Department store Kohl’s (NYSE: KSS) resides in a number of shopping centers. This company operates in a highly competitive industry with multiple competitors such as J.C. Penney’s and Men’s Wearhouse. In spite of this, Kohl’s managed an 5% annualized growth in revenue between 2008 and 2011 (see table below).

<table> <tbody> <tr> <td colspan="2"> <p><strong>Kohl’s growth figures 2008-2011</strong></p> </td> </tr> <tr> <td> <p>Sales</p> </td> <td> <p> 5% per annum</p> </td> </tr> <tr> <td> <p>Operating income</p> </td> <td> <p> 9% per annum</p> </td> </tr> <tr> <td> <p>Net income</p> </td> <td> <p> 11% per annum</p> </td> </tr> <tr> <td> <p>Operating cash flow</p> </td> <td> <p> 8% per annum</p> </td> </tr> <tr> <td> <p>Free cash flow</p> </td> <td> <p>21% per annum</p> </td> </tr> </tbody> </table>

*Source: SEC Filings

Kohl’s value priced model, resulting brand recognition, and clean looking interiors add to its qualitative appeal. If someone doesn’t feel like paying $200 for a wallet at Coach then they could go to Kohl’s and buy one for $30.

Investors may want to wait for a while to see how Kohl’s will fare from the holidays. Year to date 2012 net income declined 14% versus the same time last year. Emphasis on competitive.

Total stores sales growth increased every year since 2008; however, the rate of increase declined from a high of 7% in 2010 to 1% in 2012. Same stores sales growth went from a positive 4% in 2010 to a decline of 0.3% in 2012. Kohl’s dividend last quarter exceeded free cash flow. Kohl’s trades at 10 times earnings; however, it may represent a value trap.

In summary, shopping malls provide ideas for investments. However, due diligence is required before arriving at a prudent investment decision. Wal-Mart, Dollar Tree, and McDonald's continue to benefit from the trend of people coming to a shopping center looking for high quality merchandise at a cheap price. Kohl’s numbers show competitive strain from multiple competitors. Nonetheless, all of these companies warrant a place on your Motley Fool watch list (sign-in required).

stockdissector owns shares of McDonald's mentioned. The Motley Fool recommends McDonald's. The Motley Fool owns shares of McDonald's. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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