Sell Amazon, buy Indigo and other retail calls

Some people like to joke about lifting their spirits with ‘retail therapy'. Many retailers, however, need therapy themselves.

After a brutal 2008 capped by a crummy Christmas, retailers are wishing for a good holiday selling season. So far, Christmas 2009 looks decent, but not great.

Meanwhile, in the stock market, investors have bid up retailing stocks in anticipation of an economic recovery.

Apparel retailers are up about 70 per cent this year, department stores have gained about 63 per cent, and general merchandise retailers have risen 38 per cent.

That bounce came off a miserably low bottom. Take Nordstrom Inc, for example. The Seattle-based department store chain traded for more than $49 (Dh179.8) a share at the end of 2006, then fell to about $13 at the end of 2008. Today shares are valued at about $35.

Nordstrom's long-term debt, which was $624 million as recently as February 2007, stands at more than $2 billion, or 183 per cent of stockholders' equity. That's worse than most of its peers, but plenty of retailers have seen their balance sheets weakened during the past six to eight quarters.

Here's my current view on the biggest retailers by stock market value, plus a few others that I think look particularly good or bad.

Wal-Mart Stores Inc. Sell. At a market value of $201 billion, Wal-Mart is almost four times the size of its nearest competitor, Amazon.com Inc. With its low-price strategy, the Bentonville, Arkansas, company withstood the recession far better than most competitors.

In 2008 its stock gained 20 per cent, including dividends, while the Standard & Poor's 500 Index fell 37 per cent. But that was then. Now, shoppers are slowly starting to go back to their regular stores. So far this year, Wal-Mart shares are down slightly, while most retailers have climbed.

Amazon.com Inc. Sell. Every year, total online sales grow as a percentage of total retail sales. And Seattle-based Amazon is the king of online. So why don't I like the stock? One word: Valuation. Amazon shares fetch about 75 times earnings and 15 times book value — ridiculous multiples, in my view.

In good shape

Home Depot Inc. Buy. Shares in the Atlanta home-improvement retailer fetched more than $68 in 1999. Today they sell for about $29. Four years of stock-price declines (from 2005 through 2008) rubbed the sheen off these shares.

But the company's balance sheet is in good shape, its dividend yield is about 3 per cent and its do-it-yourself clientele may expand if the economy recovers but doesn't boom.

CVS Caremark Corp. Buy. The Woonsocket, Rhode Island, drugstore chain has posted rising earnings seven years in a row, and will make it eight this year unless analysts are wildly off the mark.

CVS has overtaken rival Walgreen Co. as the largest drugstore chain by revenue. Its stock sells for only 12 times earnings and 1.2 times book value (corporate net worth per share).

Walgreen Co. Sell. Deerfield, Illinois-based Walgreen is having its lunch eaten by CVS. In 2008 CVS notched sales of more than $406,000 per employee, and that figure had risen two years in a row. Walgreen did only about $266,000 per employee, and that figure was its lowest since 1999.

Aeropostale Inc. Buy. This New York City-based clothing retailer appeals to teenage buyers with trendy yet inexpensive fashions such as hooded sweatshirts for $22. The company is debt-free and earned a 54 per cent return on equity in its last fiscal year, ended January 2009. The stock sells for 11 times earnings.

Indigo Books & Music Inc. Buy. Based in Toronto, Indigo is the largest book retailer in Canada, according to its website. It operates stores under the names Indigo, Chapters, World's Biggest Bookstore, Coles, and SmithBooks.

Before a misstep in fiscal 2009 (ended in March), it had posted rising earnings for six straight years. The stock sells for only seven times earnings.

Disclosure note: I currently have no long or short positions in any of the stocks discussed in the column, either personally or for clients.