|
Published: August 25, 2010
Investors see little reason to buy any stocks having to do
with housing right now, and for good reason. Recent data tell us
that the long-awaited upturn in housing is still over the
horizon. So shares prices -- especially among home furnishing
retailers -- fall and fall some more. In the last three months,
shares of Kirkland's (Nasdaq: KIRK) have lost almost half
of their value, Haverty's (NYSE: HVT) and Ethan Allen
(NYSE: ETH) have fallen by roughly one-third, while Bed,
Bath, & Beyond (Nasdaq: BBBY) and Pier One Imports (NYSE:
PIR) have fallen roughly -20%.
One could assume the sell-off was the result of steadily falling
profit estimates, yet consensus expectations for Bed, Bath &
Beyond's profit in 2010 and 2011 have remained flat in the past
three months, and Pier One's profit outlook has actually been
strengthening. (Ethan Allen and Haverty's, which focus on more
expensive bedroom and living room sets, have been the subject of
downward estimate revisions).
As the table below shows, these stocks now range from reasonably
priced to dirt cheap.
|
 |
I am not a big fan of Haverty's and Ethan Allen at current
levels, due to their greater dependence on large transactions
and their still-high
P/E ratios. Yet Kirkland's, Pier One, and Bed Bath & Beyond
should hold real appeal -- each for distinctive reasons.
Kirkland's
As noted above, this stock has been a stark underperformer this
summer. Shares traded near $25 in late April when investors
expected to see a slow rebound in consumer spending. With that
catalyst off the table, shares have plunged to just $10. The
final blow came last Friday when the company noted a slowdown in
consumer spending and reined in guidance for the second half of
the year, pushing shares down -27% in a day.
But Kirkland's 287 stores should simply tread water for the next
few quarters and avoid any serious trouble.
Cash flow should remain solid and the company already has
$66 million in net cash, which should be more than enough to
stave off any concerns that further dips in consumer spending
would make the company a candidate for bankruptcy, as was the
case with rivals Bombay and Linen's & Things. The demise of
those firms also means that Kirkland's will see less competition
and show better
earnings
leverage when the economy finally rebounds. Trading at
around six or seven times earnings, shares are undeniably cheap.
Earnings estimates may come down a bit in coming days as last
Friday's results are digested, but the forward P/E is unlikely
to rise above eight.
Bed, Bath & Beyond
Bed, Bath & Beyond is the industry's dominant player. Thanks
to savvy merchandising and cost controls, the company has
developed a strong following on Wall Street, and as a result,
not been hit as hard as some of its smaller peers. Management is
also held in high regard due to a history of very conservative
guidance, which invariably allows the retailer to top estimates
every quarter. Shares trade for just 12 times next year's
profits and would likely garner a multiple in the mid to high
teens in a more robust economy. I am leaving my commentary brief
on this well-known name, but I am a big fan.
Pier One Imports
This has been one of the most under-appreciated
turnaround stories of 2010. Just a few years removed from a
flirtation with bankruptcy, Pier One has had a strong run of
good news: rivals have gone out of business, the company's team
of buyers started to deliver more appealing wares, gross margins
rebounded and open-ended losses turned into profits.
The rebound was in full evidence when Pier One reported fiscal
first quarter (May) sales rose +9% from a year ago, even as some
stores were closed. On a same-store basis, sales rose an
impressive +14%. Fewer rivals also meant fewer price wars: gross
margins rose a hefty 700 basis points to 37.4% from a year ago.
Pier One will release fiscal second-quarter results in
mid-September. Analysts expect the company post a small profit,
compared to a large loss a year ago. Shares, which had moved
above $9 in the spring, are finishing up the summer below $6 and
that's put the company's P/E ratio back into single-digit
territory -- a multiple far too low for a retailer that now has
less competition and much better management execution.
Action to Take --> Pier One
likely has the greatest upside here. Per share profits could
exceed $1 once consumer spending rebounds, pushing shares up
into the low teens. Bed, Bath & Beyond should be seen as a
steady core holding for any investor looking for retail
exposure. That may seem a counter-intuitive notion as consumer
spending sags, but that is precisely the time to be researching
these stocks. Kirkland looks more like a long-term play, but
could double once consumer spending picks up.
-- David Sterman
Staff Writer
StreetAuthority |
