Citi's Bull-Bear Analysis For Costco, Carter's, Staples

Citi's Kate McShane revisited the investment thesis on three Neutral-rated retailers - Costco Wholesale Corporation COST, Carter's, Inc. CRI and Staples, Inc. SPLS.

Costco: SSS Trends

Same-store sales trends continue to be the key point of focus for investors. The bull thesis centers on the company’s ability to return to high mid-single-digit SSS growth in FY17.

“We like COST's membership format, its merchandising strategy, the draw of its ancillary businesses, its e-commerce initiatives, and the upcoming benefit from its new US credit card,” analyst Kate McShane wrote. Moreover, the company was also committed to returning cash to shareholders.

McShane added, however, that SSS trends had been “somewhat underwhelming” over the past few months; and that the shares had risen to the higher end of their historical ranges, leaving the stock fairly valued at current levels.

Carter's: Multiple Levers for Growth

The brand is strong and enjoys a leading dominant market share in the baby category. While the company has multiple growth drivers, any upside to shares would depend on SSS trends stabilizing and management continuing to execute on its side-by-side store expansion plan, which could boost OshKosh EBIT margins.

Carter’s also indicated that it may use debt to increase capital return to investors. McShane expects pressure on the company’s direct-to-consumer sales growth to persist in the near term and may be even in the longer term. She further commented, “We believe CRI should trade in line with its three year average until investors see SSS stabilization and growth closer in line with mgmt’s long term targets.”

Staples: Target Multiple

While competition is intensifying, the market is shrinking. Demand for paper, ink and toner as well as PCs and tablets remains weak, while Amazon.com, Inc. AMZN continues to extend in the office supplies and office tech arenas.

McShane cited the lack of a potential upcoming product cycle or tech innovation as well as the lack of a potential merger as factors that could make the shares trade below the target multiple.

“We maintain our Neutral rating as we remain on the sidelines on the overall office supplies industry, given the secular and structural declines in core office supplies, the mix shift toward lower margin tech products, the weak macro environment and intensifying competition from online retailers,” the analyst stated.