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Fundamental, Industry, Thematic, Thought Leading
Deutsche Bank Company Research’s Research Product Committee has deemed
this work F.I.T.T. for our clients seeking differentiated ideas. Our retail team, along
with our real estate team, has looked at the likelihood that U.S. retailing has
matured, leading in turn to slowing square footage growth -- followed by lower
EPS and multiples, and ultimately a shakeout among weaker players.
Deutsche Bank Securities Inc.
All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from
local exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies.
Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should
be aware that the firm may have a conflict of interest that could affect the objectivity of this report.
Investors should consider this report as only a single factor in making their investment decision.
Independent, third-party research (IR) on certain companies covered by DBSI's research is available to customers of
DBSI in the United States at no cost. Customers can access this IR at http://gm.db.com, or call 1-877-208-6300 to
request that a copy of the IR be sent to them.
DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1
FITT Research
Top picks
Best Buy (BBY.N),USD41.03 Buy
O'Reilly Automotive Inc (ORLY.OQ),USD27.21 Buy
PetSmart, Inc. (PETM.OQ),USD21.23 Buy
Target (TGT.N),USD51.96 Buy
Sears Holdings Corp. (SHLD.OQ),USD101.43 Sell
Companies featured
Lowe's Companies (LOW.N),USD24.03 Hold
AutoZone (AZO.N),USD117.13 Hold
Bed Bath & Beyond (BBBY.OQ),USD29.43 Hold
Best Buy (BBY.N),USD41.03 Buy
Big 5 Sporting Goods (BGFV.OQ),USD8.67 Hold
Borders Group (BGP.N),USD6.54 Hold
BJ's Wholesale Club (BJ.N),USD36.27 Hold
Barnes & Noble (BKS.N),USD30.58 Hold
CSK Auto, Inc (CAO.N),USD11.48 Hold
Circuit City (CC.N),USD4.97 Hold
Costco Wholesale (COST.OQ),USD65.32 Hold
Cost Plus (CPWM.OQ),USD3.29 Hold
CVS Caremark Corporation (CVS.N),USD39.82 Buy
Dillard's (DDS.N),USD20.79 Hold
Dick's Sporting Goods (DKS.N),USD25.09 Buy
Dollar Tree Stores (DLTR.OQ),USD28.58 Hold
Family Dollar Stores (FDO.N),USD19.47 Buy
Home Depot (HD.N),USD27.91 Hold
J.C. Penney Company (JCP.N),USD38.71 Hold
Nordstrom (JWN.N),USD33.99 Hold
Kohl's (KSS.N),USD43.16 Buy
Longs Drugs (LDG.N),USD37.69 Hold
Macy's, Inc. (M.N),USD22.78 Buy
99 Cents Only Stores (NDN.N),USD9.05 Buy
Office Depot (ODP.N),USD10.92 Hold
OfficeMax (OMX.N),USD19.12 Hold
O'Reilly Automotive Inc (ORLY.OQ),USD27.21 Buy
PetSmart, Inc. (PETM.OQ),USD21.23 Buy
Pier 1 Imports (PIR.N),USD7.81 Buy
Rite Aid Corporation (RAD.N),USD2.29 Hold
RadioShack (RSH.N),USD15.42 Hold
Sears Holdings Corp. (SHLD.OQ),USD101.43 Sell
Saks Inc. (SKS.N),USD11.79 Hold
Target (TGT.N),USD51.96 Buy
Tuesday Morning Corp. (TUES.OQ),USD5.02 Hold
Walgreen (WAG.N),USD35.44 Hold
Wal-Mart (WMT.N),USD55.15 Buy
Williams-Sonoma (WSM.N),USD25.36 Hold
Fundamental: we expect retail spending to subside with a ripple effect
Consumers have spent robustly since 2001, and retail store development has
been based on this spending. However, as job growth weakens and inflation eats
into personal income, retail spending is likely to subside in coming years. We
expect this to lead to store closures and a reduction in square footage growth.
Industry: estimates and multiples are too high
Generally speaking, the most reliable way for retailers to lift profits is by opening
new stores. However, with the market’s limited ability to support incremental
square footage, we believe earnings estimates and growth rates will fall. In turn,
we have reduced our 2008 and 2009 EPS estimates for the hardline group by 7%
and 9% on average. For the broadline group, we have reduced our 2008 and 2009
EPS estimates by 4% and 5% on average.
Thematic: play the share gainers and avoid the share losers
With the U.S. currently over-stored and consumers pulling back, we see a
shakeout of the weaker players. Ultimately this would leave the better retailers in
stronger positions to capitalize on consolidation. Historically, over the medium to
longer term, stocks of retail share gainers have outperformed those of share
losers, so we recommend owning those capturing share and avoiding those “land
banks.”
Thought leading: multiples are not going back to average levels
Retail multiples are currently significantly below historical averages on a P/E and
relative P/E basis. Some investors are anticipating a revision to the mean.
However, our work shows that multiples track square footage growth. So, with
our view that square footage growth is in a secular decline, we believe retail
multiples will be permanently set to a lower range.
Estimate and price target revisions
In conjunction with this report, we are adjusting numerous earnings estimates and
price targets. We advise investors to stick with market share gainers, which, in our
view, include BBY, DKS, ORLY, CVS, TGT, WMT, and KSS. Please refer to Figure
23 and Figure 26 for more details.
Table of Contents
Executive summary ........................................................................... 3
Closets are full ................................................................................... 5
Lower square footage hurts EPS growth ...................................... 13
Maturity curves also affect average P/E multiples....................... 23
Shakeouts benefit market share gainers....................................... 29
Impact on shopping centers ........................................................... 41
Hardline price target, valuations and risks.................................... 46
Broadline price target, valuations and risks.................................. 53
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