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12 February 2009
Broadline Retail
Q4 Preview: Attractive Entry
Point for Select Retailers
Bill Dreher Jr
Research Analyst
(1) 212 250 5427
bill.dreher@db.com
Shane Higgins
Research Associate
(1) 212 250 6620
shane.higgins@db.com
Lindsey Bell
Research Associate
(1) 212 250 8343
lindsey.bell@db.com
Q4:08 EPS Preview, Model Book, and Sensitivity Analysis
Going into FQ4:08 EPS season, we believe select retail stocks such as WMT, M,
KSS & JCP are poised to outperform as their (1) FY09 EPS estimates are very
achievable, (2) up-for-grabs sales should drive top lines ahead of the economic
rebound (3) we’re entering a seasonally strong period for retail stocks & (4) trading
multiples are close to multi-year lows. As macro headwinds subside into FY10
with fiscal & monetary stimulus and lower energy costs, these consumer
discretionary stocks could begin a period of significant out-performance.
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 IR at
http://gm.db.com/IndependentResearch or by calling 1-877-208-6300. DISCLOSURES AND ANALYST CERTIFICATIONS ARE
LOCATED IN APPENDIX 1.
Industry Update
Top picks
CVS Caremark Corporation (CVS.N),USD27.65 Buy
Macy's, Inc. (M.N),USD8.50 Buy
Kohl's (KSS.N),USD37.93 Buy
J.C. Penney Company (JCP.N),USD15.82 Buy
Wal-Mart (WMT.N),USD48.23 Buy
Companies featured
CVS Caremark Corporation (CVS.N),USD27.65 Buy
2007A 2008E 2009E
EPS (USD) 2.08 2.45 2.57
P/E (x) 17.7 11.3 10.8
EV/EBITDA (x) 9.9 6.8 6.3
Macy's, Inc. (M.N),USD8.50 Buy
2008A 2009E 2010E
EPS (USD) 2.12 1.23 0.85
P/E (x) 17.0 6.9 10.0
EV/EBITDA (x) 7.5 4.6 4.6
Kohl's (KSS.N),USD37.93 Buy
2008A 2009E 2010E
EPS (USD) 3.39 2.79 2.80
P/E (x) 18.4 13.6 13.6
EV/EBITDA (x) 9.5 6.5 6.1
J.C. Penney Company (JCP.N),USD15.82 Buy
2008A 2009E 2010E
EPS (USD) 4.90 2.52 0.40
P/E (x) 13.5 6.3 39.8
EV/EBITDA (x) 6.9 3.0 6.7
Wal-Mart (WMT.N),USD48.23 Buy
2008A 2009E 2010E
EPS (USD) 3.12 3.36 3.52
P/E (x) 15.0 14.3 13.7
EV/EBITDA (x) 8.3 7.6 6.9
Target (TGT.N),USD31.75 Buy
2008A 2009E 2010E
EPS (USD) 3.33 2.89 2.79
P/E (x) 18.1 11.0 11.4
EV/EBITDA (x) 9.5 6.8 6.6
Related recent research Date
Retail Shakeout to Drive Leaders Ahead of Recovery
Bill Dreher Jr 21 Jan 09
Global Markets Research Company
Department Stores Hardest Hit by Macro Slowdown
The consumer pullback most impacted the Department Stores with very weak Q4
comps (e.g., KSS -9.1%, JCP -10.8%, M -7.0%). Even more severely impacted
were the higher-end department stores like Nordstrom (-12.5%) and Saks
(-15.3%), who were forced to markdown prices aggressively to clear inventories,
and this job may still not yet be completed. Despite rebounding off multi-year
lows, we believe there’s significant upside to select department store names,
particularly M, KSS, and JCP as their inventory levels appear to be in decent
shape, as reflected by recent comments on the January sales releases. FY09 EPS
estimates appear in line with management’s draconian assumptions and they will
all be key beneficiaries of up-for-grabs market share in the coming quarters.
Market Share Up-for-Grabs an Opportunity Beginning in H2:09
As we recently highlighted in our Retail Industry ’09 Outlook titled, Retail Shakeout
to Drive Leaders Ahead of Recovery (dated 1/21/09), we anticipate significant
market share up-for-grabs resulting from a growing roster of struggling retailers
closing doors or filing for bankruptcy and/or liquidating (e.g., Mervyn's, Goody’s &
Circuit City). We currently estimate that, based on sales of stores that have
already closed or are currently liquidating, there is about $19.3B in share up-forgrabs
among Apparel, Footwear & Department Stores ($5.4B);
Furniture/Homegoods Retail ($2.0B); and Electronics Retail ($11.8B) for 2009. By
H2:09, we expect that our market share gainers will begin to show the benefit of
the up-for-grabs sales, which should not only boost the comps, but should help
margins too.
FY09 Guidance Expected to Be Conservative
A number of our retailers have already provided FY09 guidance, including M, JCP,
BJ and CVS. Both M and JCP announced their very conservative FY09 guidance
last week, with M looking for FY09 EPS to be down between 55% and 67% on a
-6% to -8% comp. Similarly, JCP is planning for a -10% comp in FY09 on top of a
-8.8% comp in FY08. Both companies plan to cut capex going forward. CVS
provided conservative guidance in Jan for FY09 adj. EPS growth of approx +3-7%,
while BJ gave EPS growth of ~+2-7% y/y in Nov. We expect more of the same
type of guidance to be provided from our other retailers this earnings season.
(Please see company specific pages for discussion on Valuation and Risks)
Q4 Earnings Preview
A Difficult Quarter and Cautious Outlook for ‘09
Consumers Under Intense Pressure- With Little Relief in Sight
The macro weakness since late 2007 accelerated in mid-September and October, just ahead
of the critical fourth quarter. The S&P 500 index from early September until the end of
January declined –35.6%, hitting consumers’ retirement accounts and spreading fear of a
deeper recession. The fall in the equity market coincided with the continuing collapse of the
housing market. Housing prices as measured by the S&P/Case-Shiller index (housing prices in
20 major metro markets) fell by -17.4% y/y in September, -18.1% y/y in October, and -18.2%
y/y in November, further crimping consumers’ balance sheets. The declines in asset values
are coming at a time when banks are tightening credit and consumers’ are saving more,
furthering reducing spending.
Non-farm payrolls continued to decline throughout Q4, with –597,000 jobs lost in November,
-577,000 in December, and –598,000 in January. The unemployment rate jumped to 7.6% by
the end of January, up sharply from 4.9% in January last year, and the highest level since
1992. The impact of falling asset values and the concern over job security hammered
consumer confidence. The Conference Board’s consumer confidence index reached an alltime
low of 37.7 in January, while the University of Michigan’s consumer sentiment index
was 61.2, within the range of the past several months, but down sharply y/y.
DB economics expects unemployment to rise throughout 2009, reaching 8.7% by year end.
U.S. GDP fell –3.8% in Q4:08 and DB economics forecasts that it will decline by -6.5% in
Q1:09 and -2.8% in Q2:09, before turning flat (0%) in Q3 and growing slightly at +1.0% in Q4
this year. DB Economics does not anticipate a sharp recovery.
Fortunately for consumers, there has been some relief from lower gasoline prices, which
were down about -40% in Q4:08 vs. Q4:07, and we expect that lower gasoline and energy
prices should act as a tax-cut for consumers this year. Also, the government’s fiscal stimulus
plan (above the amount of last year’s stimulus) could potentially help consumers later in ’09,
though it is still unclear how much of an effect any plan will have on spending.
Based on the recent macro data and the outlook for the remainder of 2009, we expect
consumers to remain cautious, with spending focused on essentials.
Department Stores See Sharpest Q4 Declines in Sales, Margins, EPS
The more cautious consumer pulled back sharply on spending, particularly on more
discretionary merchandise, like apparel, shoes, jewelry and accessories, and in areas more
leveraged to growth in housing, like furniture and homegoods. Department Stores were
clearly the most impacted by this pullback, as reflected in their very weak comps (see Figure
1, below).
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