Outlook And Price Targets On Specialty Retailers

In the week of first quarter retail earnings results, Lee Giordano of CRT Capital weighed in on several specialty retailers.

Buckle: Fair Value, $49 Price Target

• Giordano notes that Buckle BKE is one of the most consistent specialty retailers. The company often reports earnings at or near analyst expectations. Revenue, for example, has been within three percent of the consensus for the past seven quarters.
• The $49 price targets is 14 times 2014 EPS, above the three year PE of 13.4 times and below the peer group’s 17 PE.

Callaway Golf: Buy, $11 Price Target

• 30 percent upside for Callaway ELY because it has the potential to expand its market share to previous levels. In 2007 Callaway controlled 19.6 percent of market, compared to just 15.1 percent now.
• “We estimate every percentage point of market share globally translates into approximately $40-50mn of wholesale sales. Thus a five point market share increase could represent between $200-$250 million in increased revenue for Callaway over time.”
• The $11 price target was derived with an 11 times multiple on 2015 EBITDA, slightly above comparables.
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Nautilus: Buy, $13.5 Price Target

• Two key catalysts for the Buy rating are Nautilus’ NLS fitness business and growing sales with the capacity to grow margin over ten percent.
• “Nautilus has demonstrated an ability to lead the fitness industry in achieving successful product launches through consumer driven innovations, representing a sustainable competitive advantage.”
• CRT sees shares trading above the peer group at 12 times 2015 EBITDA.

Dicks Sporting Goods: Buy, $65 Price Target

• CRT calls Dick’s a best of breed retailer and sees organic store growth growing over 1100, much of which will be driven by small market stores. Giordano also commented that he expects margins to reach 10.5 percent by 2017.
• Sporting goods retailers are currently trading at 14 times earnings, but the growth story is enough for CRT to base its price target on 18 times earnings.

LeapFrog: Fair Value, $7.50 Price Target

• LeapFrog’s LF competitive advantage is large library of content that is has created or curated.
• “We believe LeapFrog remains well positioned as a leader in the children’s educational entertainment category with a strong brand, a differentiated content strategy, and a consistent track record of innovation and new product development.”
• The $7.50 price target is 24 times 2015 earnings, but includes $3 of cash.

Cabela’s: Buy, $80 Price Target

• Cabela’s CAB currently only has 50 stores, but has potential for 225 in the long run. The company currently plans to open 14 per year.
• “We look for continued growth in Cabela’s branded product, which should also help boost margins longer term.”
• $80 price target is 19 times forward EPS, far above the peer group’s 14.
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Zumiez: Fair Value, $30 Price Target

• The teen market place is very tough with, “sluggish mall traffic, high teen unemployment, and promotional pressures.”
• Zumiez ZUMZ is already trading at a premium multiple although it is well established and has room for organic growth.
• $30 price target is 19 times 2014 EPS, inline with three year average PE, but above comparables 16 times.

Skullcandy: Fair Value, $8 Price Target

• CRT believes Skullcandy SKUL can return to profitability now that new management is in place. Giordano is impressed with the former Nike executive’s strategy and execution.
• The $8 price target is eight times the 2015 EBITDA, below the three year average. However, this is a premium to the peer group because of the company’s turnaround potential.

Spectrum Brands: Buy, $90 Price Target

• CRT believes Spectrum Brands SPB is a value play with 23 percent upside. Growth is stable and the company has the potential to increase its free cash flow.
• Giordano also commented on M&A activity: “We believe Spectrum Brands will continue to grow its branded portfolio through accretive acquisitions providing upside potential to both sales and margins. The Company has a strong track record of growth through acquisitions and a core competency in integrating brands into its portfolio.”
• The $90 price target was set with multiples inline with competitors.