Susquehanna: Consumers Continue To Move Shopping Online; Discount Retailers Are Winning The Brick-And-Mortar Race

A “steadily improving” economy and 4.8 percent unemployment rate are benefiting retailers with a strong online presence — and leaving those who depend on brick-and-mortar sales out in the cold.

That’s the message from Susquehanna, which started a range of retailers Friday. Analyst Bill Dreher gave a positive rating to nameplates such as Costco Wholesale Corporation COST — which Susquehanna said is one of the sector’s few international growth stories, and an “Amazon-resistant” one at that — and a negative to retailers such as Sears Holding Corporation SHLD, which Dreher said has seen falling revenue and a net loss every year since its 2006 marriage with Kmart.

Retailers that depend on department store sales will continue to struggle with right-sizing and face a 2017 holiday season with “bleak” results, Dreher said.

“The only sectors insulated from this online takeover are those who ship materials difficult to deliver over the internet, such as off-price merchandise TJX's T.J. Maxx and Ross Stores, Inc. ROST], or deep value & consumable products WMT and Costco].”

Retail Roundup

Here’s a look at Susquehanna’s analysis of individual retailers:

Big Lots is America’s largest closeout retailer, with 1,442 stores in 47 states, according to Susquehanna. Big Lots stores rely on a mix of essentials and select higher-margin products, and the company is perfecting its locations, Dreher said. The retailer’s risk/reward profile is balanced, Dreher said.

In addition to Costco’s consistent growth, Dreher also notes the warehouse chain’s commitment to rising online sales — and its “incredibly strong” board of directors. “Costco Wholesale is a retailer I expect will be there for my children when they grow up, and COST shares are of the quality I would recommend for my parents to invest in,” the analyst said.

While Dillard’s occupies a physical corner of the market where it has an advantage — small towns with limited competition — the internet has impacted the retailer, along with frugal consumers and the decline of malls. Dillard’s is refining and reducing its locations in favor of stores at popular lifestyle centers, Dreher said. The company has employed a stock buyback program since 2009 that has reduced the share count by roughly 50 percent.

J.C. Penney is a company that’s improving, Dreher said. It’s repositioning itself, increasing sales-per-square-foot, cutting debt and boosting its EBITDA. Penney’s is also positioned to benefit from the closure of physical Macy’s and Sears stores, he said, and has integration between its online and physical operations.

Susquehanna also views Kohl’s as having a balanced risk/reward profile and fair valuation, and termed the company’s stores “a better mousetrap,” with centralized checkouts, racetrack aisles, amphitheater shelving and convenient locations. TOn the bearish side, the company’s Private Label and Executive lines aren’t resonating with consumers, Dreher said, and operating income has declined each fiscal year since 2011.

While Macy’s is adjusting its real estate holdings with closures and alternate uses, Dreher said its new Backstage concept is “potentially harmful” to full-price sales, and added that the company’s EBITDA margin goal of 14 percent is challenging. Susquehanna is forecasting 11.1 percent EBITDA at the end of fiscal 2016 and 10.2 percent in 2017.

“We believe hundreds of Macy’s current locations, even half their store base, have an alternate best use that would far exceed the value of being used as a department store,” Dreher said.

Macy's market cap has plunged from $24 billion in 2006 to $9 billion today.
• Nordstrom, Inc. JWN initiated at Neutral with a $47 price target.
Nordstrom’s valuation is fair, and the retailer is diversified, Dreher said. The company’s department stores — which benefit from good service and locations — are also hurt by declining mall traffic. Nordstrom’s online business’s growth is impacting expenses, Dreher said, while its Nordstrom Rack line is growing rapidly and attracting millennial consumers.
• Ross Stores initiated at Positive with a $80 price target.
Ross Stores is the largest American retailer dealing only in off-price goods, according to Susquehanna — a “treasure hunt” form of retail that’s distinct from online sales. The company has potential for growth in the Midwest and New England and will benefit from the death of other, traditional retailers.
• Sears initiated at Negative with a $4 price target.
Now the dark side. Since merging with Kmart in 2006, Sears revenue has dropped each year, and it’s been “spinning off assets each year to survive,” Dreher said. Those include Seritage, Lands’ End, Sears Canada, Sears Hometown and Orchard Supply. The Susquehanna report raises the prospect of bankruptcy as a means to shave $2 billion in pension obligations and monetize the company’s real estate holdings.
• Target Corporation TGT initiated at Neutral with a $70 price target.
While Target’s management is playing to the company’s strengths — fashion, baby, kids, wellness — the retailer also has an “unresolved identity crisis” in the grocery aisle, Dreher said. Target also faces hard competition in apparel, as well as online growth that could drive down in-store sales.
Benzinga previously reported on the retailer's disappointing holiday sales guidance.
• TJX Companies initiated at Positive with a $92 price target.
TJX has a corner on the “deep value” market for name-brand items, Dreher said, and it’s one that appeals to younger and fashion-conscious consumers. The company’s inventory changes every three to four days, making it competitive with the ever-shifting online market. Finally, TJX has potential for international expansion, the Susquehanna analyst said.
• Wal-Mart initiated at Positive with a $80 price target.
The retail giant is exiting an investment phase and its returns are accelerating, Dreher said, and it has a history of outpacing expectations. He also sees Wal-Mart succeeding with its online grocery expansion and purchase of Jet.com, and in the online sector generally.