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Three Retail Bargains that aren’t Really Damaged Goods

January 01, 2013 | About:



Off-price retailers often sell last season’s merchandise, ‘scratch and dent’ or otherwise less than perfect wares. Shoppers are still willing to buy at the right price. The stock market is the same way. It’s rare to find great companies at huge discounts. To get the best bargains you have to accept some type of blemish.

As long as you know what the ‘irregularity’ is you can make an informed decision. GameStop (GME), Big Lots (BIG) and Staples (SPLS) all have perceived flaws. They all remain highly profitable and sell cheaply enough to be very interesting.

The ongoing results from each of these have stayed strong even as investor sentiment has deemed them to be basket cases. GameStop was ‘supposed’ to fail years ago as on-line delivery of new video game product was rolled out. Despite all the naysaying FY 2012 (ends Feb. 2, 2013) is expected to hit an all-time high of $3.19 per share.

GME’s EPS were $1.48 in FY 2007 when the stock peaked at $36.20. Traders paid a 24.5x multiple back then and got no yield. Today you can buy debt-free GME shares for about 9x earnings with a 4% dividend.

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GameStop trades for under $25. It doesn’t seem a stretch to think it could hit $35 within a year. That would only take a rebound to about 10.3x Zacks’ forward estimate of $3.42.

Closeout retailer Big Lots recorded record profits of $2.99 per share in FY 2011. This year is now expected to come in modestly lower at $2.91. That 2.7% earnings drop off appears to be more than reflected in their current price tag of $28.46. The stock has been marked down 39.7% from last winter’s high point.

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BIG’s valuation is the second lowest ever. Buyers at the 2009 nadir got a chance at tripling their money in about 16 months. The two more recent sojourns into sub-eleven multiples each provided excellent trading opportunities.

$40 -$45 appears well within reach at just 13x – 14x the Zacks estimate for FY 2013. BIG touched highs of $41.40 and above during each of the past three years.

Office Supply giant Staples was being hailed as an American success story until 2007. Earnings stalled in the Great Recession and are just now re-approaching their old highs (excluding non-recurring charges).

SPLS might be unappealing if the stock wasn’t down 58.8% from the 2007 pinnacle of $27.70. At $11.40 they are offered at about 8.2x this year’s estimate along with a 3.86% yield.

Management is hard at work right-sizing their retail square-footage while continuing to cultivate online sales with quick local delivery. SPLS was #2 in total internet revenues last year with about $10 billion derived from that channel.

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I think forecasts of Staples demise are misguided. If you agree, their single digit P/E, nice dividend and huge upside make this a compelling play. Staples garners a B++ financial strength rating from Value Line. It also sports a 95th percentile ranking (100th being best) for earnings predictability.

A 12-month target sell zone of $18- $22 doesn’t seem far-fetched at all. Staples shares topped out above $22 during portions of each of the eight calendar years from 2004 through 2011. SPLS touched almost $17 in 2012. A return to just 2012’s peak would represent a greater than 50% total return.

GME shares had a flattish year in 2012. BIG and SPLS got creamed. Tax selling season is now over. I expect all three of these names to do exceptionally well in the new year. Murphy’s Law says if you choose to own just one of this trio it will be the other two will end up the biggest winners.

I am long SPLS and BIG currently. I’m hoping for a pull-back (and risking Murphy’s wrath) in delaying purchase of GME.


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