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Analysts at Citi recently took a look at hardline retail stocks and the new omni-channel initiatives that are driving capex in the space. Analysts believe that these investments are likely to pay off for several names down the road.
Does higher capex means higher share price?
Citi analysts looked at capex as a percentage of total revenue. Rather than focus specifically on online or brick-and-mortar spending, analysts feel that it is important to look at a company's overall capex. While the online channel is certainly a major part of the shift in hardline retail in recent years, analysts also see the importance of providing a better, more convenient shopping experience by opening more stores and/or renovating older ones.
Auto parts
According to the report, auto parts retailers are spending more in capex than any other hardline segment. O'Reilly Automotive Inc
ORLY is the biggest spender of the group in terms of capex/sales and leads peers Advance Auto Parts Inc
AAP and AutoZone Inc
AZO in terms of quarterly comp growth.
Home improvement
Lowe's Companies Inc
LOW has typically out-spent rival The Home Depot Inc
, but Lowe's stock has underperformed Home Depot's in recent years. Analysts believe that the fact that Home Depot executed its nationwide expansion prior to Lowes gave it a lingering competitive advantage.
Analysts also note that Williams-Sonoma Inc
WSM has vastly out-spent Bed Bath & Beyond Inc
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in terms of online-related capex.
Top pick
Analysts see big capex increaseS ahead for Lowe's, Advance Auto Parts and Best Buy Co Inc
BBY. They also note that it's no coincidence that these three names have often been unfavorably compared to close competitors (Home Depot, O'Reilly and Amazon.com Inc
AMZN. Best Buy is Citi's top capex pick among the three names.
Disclosure: the author holds a short position in Amazon.com.
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Posted In: Analyst ColorLong IdeasAnalyst RatingsTrading IdeasConsumer DiscretionaryHome Improvement Retail
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