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Sandy and PLCE&BBBY

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December 06, 2012 – Comments (1) | RELATED TICKERS: BBBY

Super storm Sandy had a direct hit into the hearts of some retail stores. Among the victims, there are some undervalued stocks lying on the beach Sandy left behind. The first one I am going to recommend is the Children’s Place (PLCE). Investors have abandoned the Children’s Place (PLCE) recently. Shares price dropped more than 15.5% on Thursday last week on cut earnings for 2012. Management now sees full-year 2012 EPS of $3.10-$3.15, down from previous $3.20-$3.30.

According to CEO Jane Elfers, Hurricane Sandy had a devastating impact on the business and the company will roll out more promotional activities to clear out the redundant inventories. Hence, the discounts will have an impact on the 2012 earnings. Now with the new adjusted earnings, PLCE has a 12 times forward P/E ratio and no long-term debt.

There are some facts made me a contrarian investor in this stock.

1.     Balance sheet is strong. Although the storm destroyed one of the stores, gross margin will bounce back soon due to the fact comparable sales had grown 1.1% before the storm hit.

2.     E-commerce is growing rapidly for PLCE. 2012 Projected e-commerce revenue is about 10% of the total revenue. The company launched Canada e-commerce site April 2011.

3.     The cut on earnings is not so much a big deal. Look at the numbers, it’s about 4-5% down from the previous earnings. Even with a third of its total sales areas affected by Sandy, the company can still manage to maintain decent earnings for 2012.

4.     PLCE operated more than 1,102 stores, as of October. Only one store has been completely damaged. Remember this is a one-time incident so we don’t expect another hurricane hit any soon. (Maybe some other big storms will hit, but they certainly don’t hit annually like a clock.)

5.     PLCE is expanding into other countries or less natural disaster risk areas. According to the fact sheet, Canada stores and E-commerce contributed 23% sales by channel in 2011.

6.     PLCE is very good at showing in-store experience and inventory control. No need to say, the brand name is one of the best among competitors.

 

 

PLCE is well positioned to take the hit from Sandy. The Children’s Place targets middle class in the U.S and Canada and they are going to open and operate more stores in high salary areas where natural disasters are going to happen more frequently than inlands.

The next one I am going to recommend is Bed Bath & Beyond (BBBY). BBBY may be a little different from PLCE in this super storm incident. Sandy may have a little positive side to BBBY. E-commerce giant Amazon (AMZN) has lunched home furnishings website Casa.com. This action forces BBBY to invest more into e-commerce sooner than it expected.  Raising cost is a common issue among retail stores these days. E-commerce with stores combined seems to be the best way to fight off the problems.  BBBY also had actions to acquire smaller retail stores along with unique products and distributions. These actions are positive moves to reinforce recent business market shares. BBBY’s market position is already fairly stable in terms of revenue and profit margin. Its gross margin and operating margin is higher than PLCE. PLCE has a gross margin around 35-38%, and operating margin around 3-5%. BBBY’s gross margin is around 40% and operating margin around 16%. Needless to say, BBBY’s RoE is an impressive 25% plus. The forward P/E ratio for BBBY is around 10-11 times. The company has no debt and nearly $1 billion cash or cash equivalent.

Here are some points I want to list out:

1.     BBBY has strong balance sheet and earnings. Looking forward, the company is going to achieve stable low-single-digit growth though e-commerce, store expansion and potential acquisitions.

2.     Scott Black from Delphi Management added shares in BBBY after the 17% plunge after Q2 report in the summer.

3.     Housing market is bouncing back slowly.

4.     Stock repurchase is still ongoing. This is a company that achieved growth since 1993…stock repurchase makes perfect sense if the board thinks they are going to continue to grow.

5.     The company is not afraid of investing into e-commerce. (According to 2011 annual reports, the company is going to invest more into the IT departments for ongoing IT initiatives)

6.     The company has been able to finance its own operations and expansions by generated cash flow. Unlike Best Buy (BBY), this company deals with traditional house products, e-commerce will mostly toward low gross margin products. As for Best Buy, e-commerce giant Amazon (AMZN) is stealing high gross margin items like cellphone and tablets from it.

I like BBBY’s position in the market right now and it’s not the first time that institutions downgrade it to “neutral” rating. People who worried about BBBY turning into BBY certainly missed some important points I mentioned above. 

1 Comments – Post Your Own

#1) On December 18, 2012 at 3:03 PM, JohnCLeven (82.06) wrote:

Nice post. I've been considering BBBY as well.

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