The Wall Street Journal-20080130-Big Investors Intrigued by Retail Stocks
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Big Investors Intrigued by Retail Stocks
Full Text (891 words)Some investors have begun circling retailing stocks like shoppers clawing at the bargain bin.
Activist investor Nelson Peltz, through his Trian funds, boosted a stake in luxury jeweler Tiffany & Co. to 7.9% from 5.6%, mostly with purchases since the year began. Richard C. Breeden bought more shares in jeweler Zale Corp. and then joined the Irving, Texas, company's board. William Ackman, an activist investor with stakes in hard-hit Sears Holdings Corp. and Target Corp., has increased his exposure to Target through stock swaps that let him rack up gains or losses on the stock without actually holding shares.
Icelandic retail behemoth Baugur Group and its billionaire executive chairman, who hold 8.5% of Saks Inc., are preparing a bid for the entire company.
Billionaire financier Carl Icahn announced at an industry dinner Jan. 14 that, with their shares falling off the rack, retailers are attractive investments. Mr. Icahn acknowledges that his timing could be off. "I am not bullish on the economy, and it certainly could get a lot worse before it gets better," he said in an interview, adding that retail shares, in particular, "might well go lower" before they go up.
Yesterday, Barington Capital Group and Clinton Group Inc. reported in an SEC filing that they have snapped up a 5.32% stake in Dillard's Inc., a midmarket department-store chain that has seen its stock price fall more than 30% in the last six months. Barington chastised the company and called for change. Last week, Sanford C. Bernstein upgraded the U.S. retail sector to the equivalent of "buy" from "hold," saying retailing stocks have underperformed the broader market for the last three years.
Many retail stocks, including Macy's Inc. and J.C. Penney Co., rose last week. Part of the reason investors are piling in is that the retail sector has been battered more than other stocks.
Some retailers, including Coach Inc. and Target, now have forward price-to-earnings ratios, their stock price divided by expected earnings per share, near their historic lows. Retailers also tend to generate strong cash flow, and some have attractive real-estate holdings.
Consumers are expected to crimp spending in the first half, at the very least, because of high energy costs, fallout from the housing slump and sluggish employment and income growth. If a recession materializes, the share prices of retailers will fall.
As for Mr. Icahn, he has been wrong before. As of Sept. 30, he owned four million shares of Macy's, or roughly a 1% stake in the department-store operator, which has had difficulty digesting its May Department Stores Co. acquisition. Macy's is now trading at about 60% of its 52-week high. Between the end of June and the end of September, Mr. Icahn increased his Macy's stake, though he owned fewer shares as of Sept. 30 than he did at the end of 2006, according to regulatory filings.
Still, Mr. Icahn said retail shares "are very cheap." Major retailers generate enough cash to make them attractive, even without growth, he said. And unlike financial companies, which may have trouble lurking on their balance sheets, "you see what you have" with retailers, he said. "We're looking at the sector to see if it makes sense," he said, declining to discuss specific stocks.
Mr. Ackman, an activist investor who pressured Wendy's International Inc. to spin off its Tim Hortons doughnut chain, hasn't done well with his investments in hard-hit Sears and Target, either. But Mr. Ackman, who pushed Target to increase its share buybacks and sell its $8 billion credit-card portfolio, said he expects the Minneapolis-based retailer's shares will double over the next three years. The company increased buybacks and is exploring the sale of its credit-card portfolio.
A spokeswoman for Mr. Peltz said neither he nor his Trian partners, Edward Garden and Peter May, were available for comment.
Some passive investors are pouncing, too. David Dreman, chairman and chief investment manager of Dreman Value Management, which manages $18 billion, owns about 3.5 million Macy's shares and has been disappointed by their performance. While he isn't adding to his Macy's stake, he is buying the beaten-down shares of some retailers that he said "might be better positioned" in a slowdown. One is office-supply chain Staples Inc., where annual earnings per share have grown at a rate of 20% or more. Another is home-improvement retailer Lowe's Cos., where earnings might decline in the next few quarters but should over time return to a 15% growth rate, Mr. Dreman said.
"When the major retailers -- the 'growth' retailers -- get hit, we start to buy," Mr. Dreman said.
In 2002, he recalled, retail stocks "just nose-dived," with Best Buy Co., for instance, dropping to as little as $11.79 a share. Mr. Dreman was able to profit from his bets during the downturn. Best Buy stock has since then more than quadrupled, and in 4 p.m. New York Stock Exchange composite trading yesterday, its shares stood at $48.95, up 89 cents. Mr. Dreman typically holds stocks two years or longer.
Gary Balter, a retailing analyst at Credit Suisse, also said he likes home-improvement retailers at current prices and raised his ratings two weeks ago on Home Depot Inc., Lowe's and Bed Bath & Beyond Inc. to the equivalent of "buy." Concerns about an overheated housing market and potential credit problems already have beaten down housing- related names, he said.
