Rent-A-Center BUY

RCII : NASDAQ : US$26.59
BUY 
Target: US$32.00

COMPANY DESCRIPTION:
RCII is the largest RTO operator in the United States with
over 40% market share. The company operates
approximately 3,025 stores in North America. RCII also
operates nearly 1,360 AcceptanceNOW kiosks located
within retail stores, offering RTO agreements to
customers unable to garner financing to make an in-store
purchase.
All amounts in US$ unless otherwise noted.

Consumer & Retail — Specialty Retail
UPGRADING SHARES TO BUY AS MORE FLEXIBLE LABOR MODEL
SHOULD DRIVE MARGINS HIGHER
Investment recommendation
RCII dug deeper into the initiatives aimed at improving
profitability in the core business at Canaccord Genuity’s Global
Growth Conference, and we think the decision to transition to a
more flexible labor model is a no brainer. In Q2, virtually all of
the core’s yr./yr. revenue decline fell through to the bottom line
as a result of the company’s fixed-cost labor model. We think
there is an opportunity to substantially reduce labor costs by
incorporating more part-time hours into the core RTO business.
The addition of Guy Constant as CFO should prove valuable
through this transition, as his 10-year tenure in the restaurant
industry has exposed him to a much more efficient labor model.
We believe simply replacing overtime hours in 20% of core RTO
stores with part-time labor would generate over $20MM in
annual cost savings in 2015 and lift RCII’s operating profit
margin by 110bps. We are raising our rating to BUY given the
potential EBIT margin and EPS upside we believe this transition
offers.
Investment highlights
 We are increasing our long-term EPS estimates by 28% on
average. Our 2015 estimate of $2.59 is $0.25 above
consensus.
 Our price target moves to $32 based on our DCF model.

Gordmans Stores BUY More then a double BUY

GMAN : NASDAQ : US$3.96
Target Price $ 9.00
COMPANY DESCRIPTION:
Gordmans Stores is an everyday value price retailer
offering merchandise up to 60% off department and
specialty store prices. The company operates nearly 100
stores in 20 states, located in multiple shopping center
formats including regional shopping malls, lifestyle
centers, and power centers. The merchandise
assortment consists of apparel, home fashions, and
accessories including fragrances.

Consumer & Retail — Specialty Retail
WE AWAIT IMPROVED Q2 PRODUCT AS AGED INVENTORY HAS BEEN CLEARED
Investment recommendation
GMAN generated a Q2 loss of ($0.16) per share, in line with our
estimate and a penny below consensus. As expected, the
company spent the bulk of Q2 clearing out stale inventory ahead
of H2. The higher level of markdowns resulted in 95bps of yr./yr.
gross margin contraction in Q2, which did not come as a surprise
to us. We believe this was necessary to make room for an
improved product assortment, including the recent launch of a
Missy contemporary department. Gross margin should begin to
recover in H2 as better product rolls into stores. We believe SSS
will be slower to rebound, however, and we are lowering our Q3
SSS forecast to -5% on top of -6.1% versus our prior flat estimate.
This pushes our Q3 EPS estimate from $0.02 to ($0.09). We
continue to believe GMAN’s long-term recovery potential is not
reflected with shares trading at 0.2x C2015E EV/revenue.
Investment highlights
The appointment of department store veteran Andrew Hall
as CEO should bring some stability to GMAN. Hall spent six
years at Stage Stores, including a run as CEO from 2008-
2012, and 13 years prior at May Department Stores.
We are reducing our price target from $10 to $9 based on
our DCF model. There is still notable turnaround risk here,
but we believe investors will be paid for their patience.

Dick’s Sporting Goods In The Rough ?

DKS : NYSE : US$44.21 HOLD 
Target: US$49.00

Consumer & Retail — Footwear and Apparel
WORKING THROUGH STIFF HEADWINDS,

Investment recommendation
DKS reported Q2 EPS of 67c. vs. our estimate and consensus of 65c,
driven by stronger-than-expected comp growth of 3.2%, tighter expense
controls and a lower share count, partially offset by gross margin
contraction as steep promotions in golf drove traffic at the expense of
margins. The hunting category continues to experience challenges as it
comp’d -HSD in 2Q14.
That said, growth in other outdoor categories is
offsetting the weakness in guns/ammo, which drove flat total category
comps. The company provided EPS guidance of $0.38-$0.42 for 3Q14,
including a -2c impact due to higher SG&A expense related to 32 new
store openings in the third quarter.
Investment highlights
 DKS has taken meaningful steps to mitigate the impact of the
struggling golf business, but the promotional activity is expected to
continue into 2H. Also, generally high promotional activity across
the industry will impact DKS by an estimated 4c in 2H14 as it will
need to keep the promotional pace with its competitors to drive
traffic. Lastly, hunting is expected to offsetDKS is benefitting from its move to reduce sq ft in golf and increase
the space in Women’s & Youth apparel. We would like to see an
incremental reduction in golf sq ft.; however, the company is being
methodical about the space shifts and resulting cost/benefits.
Valuation
Our $49 target is a blend of 15x 2015E EPS, 8x EBITDA, and DCF the growth in other
outdoor categories in the near term.

Michael Kors Holdings Limited

KORS : NYSE : US$77.01
BUY 
Target: US$123.00

Consumer & Retail — Footwear and Apparel
SOLID Q1; BIG PICTURE GROWTH INTACT: REITERATE BUY, $123 PT
Investment recommendation
KORS reported solid Q1 EPS results of 91c vs. our 82c estimate. Stronger
comps (+24.2% vs. our 20% est.) and gross margin expansion (+20bps
vs. our -20bps est.) drove the beat. Broad based growth across
geographies and categories continues to be robust as evidenced by NA
comps of 18.7%, European comps of 54.2%, and Japan comps of 48.8%.
Not only does KORS continue to take share domestically, but it is also
taking share from luxury brands across Europe.

With respect to gross margins, wholesale margin expansion of 62 bps more than offset
incremental markdowns at retail (-48bps) that were driven by a higher
sell thru mix of markdown product despite the same SKU count and rate
of markdowns y/y. That said, margin guidance for Q2 and the year is
-50bps from down slightly previously as the much anticipated and very
natural evolution of margin normalization has begun. We therefore
expect to see modest margin contraction in both retail and wholesale in
the near term, until retail mix helps margins mix higher.

Overall, F2015 guidance was raised by a few pennies in excess of the beat. We believe
the stock’s reaction (-6%) is unwarranted given the momentum the
brand has across its business. Moreover, the current valuation (18x
forward EPS) puts KORS at a 30% discount to its growth rate. With still
vast market share growth opportunities in Europe and Asia, which
combined represented just ~16% of total sales last year, we would use
this weakness as a buying opportunity. We reiterate our BUY.
Investment highlights
Europe continues to experience dramatic growth (+128% in Q1).
With greater confidence in its brand positioning, KORS increased its
long term market opportunity to $1.5B in sales from $1B

Lumber Liquidators Holdings

LL : NYSE : US$70.42

BUY 
Target: US$100.00

COMPANY DESCRIPTION:
Lumber Liquidators is the largest specialty retailer of hardwood
flooring in the U.S. The company offers premium hardwood
flooring products in a wide variety of domestic and exotic wood,
as well as engineered products, laminates, bamboo, cork, and
accessories. Lumber Liquidators assortment is largely comprised
of proprietary brands including the flagship Bellawood brand.

Consumer & Retail — Specialty Retail
MOMENTUM VANISHES IN Q2 PUSHING OUR ESTIMATES LOWER
Investment recommendation
We are lowering our Q2 EPS estimate from $0.94 to $0.61,
compared with guidance of $0.59-$0.61 and prior consensus of
$0.90. LL reported a Q2 SSS decline of 7.1% on top of +14.9%
versus expectations of +7%. Total customers invoiced declined
5% yr./yr., the steepest decline in three years. LL did not regain
momentum after difficult Q1 weather as we had anticipated, and
management is blaming macroeconomic factors. The 131 stores
impacted by weather experienced a SSS decline of 13%, with
non-impacted stores -2%. We are lowering our FY14 EPS
estimate from $3.35 to $2.70 on SSS -2.5% on top of +15.8% (we
had previously forecast +6.3%). We still project double-digit sales
and EPS growth over the long term, keeping us BUY rated. Given
consecutive quarterly EPS misses and limited near-term visibility,
we think investors will view LL as a show-me stock over the next
few months.
Investment highlights
 An inventory shortfall accounted for $18MM of Q2’s $47MM
revenue downfall versus our estimate. LL expects quality
assurance-related supply-chain issues to resolve in Q3.
 We are reducing our price target from $122 to $100 based on our discounted free cash flow model. This is a long-term target, and reflects our belief that LL’s model of better selection, service, and value should enable it to take market share

RadioShack ( RSH) Is Collapsing

radioshack

 

Wikimedia Commons

RadioShack shares were down as much as 21% in premarket trading after the electronics retailer reported a wider than expected quarterly loss.

The company posted a net loss of $98.3 million, or $0.97 a share. Analysts were looking for a loss of $0.52 per share.

Revenue fell 13% from a year ago to $736.7 million and on a same-store basis, sales fell 14%, which the company said was driven by traffic declines and poor sales in its mobile business. Analysts were expecting revenue of $767.5 million.

The electronics retailer said it ended the quarter with total liquidity of $423.7 million, including $61.8 million in cash and cash equivalents and $361.9 million available under a credit agreement.

“Overall, our first quarter performance was challenged by an industry-wide decline in consumer electronics and a soft mobility market which impacted traffic trends throughout the quarter,” chief executive Joseph Magnacca said in a statement.

Magnacca added that the company has taken steps to cut costs, including lowering its corporate head count and reducing discretionary expenses.

These charts show RadioShack’s performance over the last year and the last decade.

It’s not pretty.

 

View gallery

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RSH1yr2

 

Google Finance

 

View gallery

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RSH10yr2

 

Google Finance

Steven Madden, Ltd.

SHOO : NASDAQ : US$32.83

BUY 
Target: US$43.00

COMPANY DESCRIPTION:
Steven Madden, Ltd., together with its subsidiaries,
designs, sources, markets and sells fashion-forward
footwear for women, men and children. The company
was founded in 1990 and is headquartered in Long
Island City, New York. SHOO has a portfolio of brands that
reaches globally among all economic tiers. SHOO offers
products through wholesale partners, an e-commerce
platform and its own retail stores.
Consumer & Retail — Footwear and Apparel
ACCENTUATING THE BRAND’S
STRENGTH VIA EXCLUSIVES
Investment recommendation
We visited the SHOO showroom to preview the late summer/early fall
’14 fashion deliveries. While the latest fashion trends were key topics of
discussion, underlying questions around consumer demand and recent
performance of SHOO’s wholesale customers were also top of mind.
First, traffic (both at retail and wholesale) is the main concern, not the
lack of trends. To combat pervasive discounting of similar products
across competing retailers, SHOO is implementing an “exclusives”
strategy to segment the market, much like Nike does with its marquee
basketball product. The exclusive shoes will be advertised as “in store
only” and should help redirect traffic back to stores while also limiting
unnecessary discounting. As for what is selling well, dress and sneakers
(pony-hair/quilted/perforated etc.) are outperforming sandals, which
have yet to rebound (although the last two weeks have been better). The
sneaker trenConsumer & Retail — Footwear and Apparel
ACCENTUATING THE BRAND’S STRENGTH VIA EXCLUSIVES
Investment recommendation

SHOO showroom  – to preview the late summer/early fall
’14 fashion deliveries. While the latest fashion trends were key topics of
discussion, underlying questions around consumer demand and recent
performance of SHOO’s wholesale customers were also top of mind.
First, traffic (both at retail and wholesale) is the main concern, not the
lack of trends. To combat pervasive discounting of similar products
across competing retailers, SHOO is implementing an “exclusives”
strategy to segment the market, much like Nike does with its marquee
basketball product. The exclusive shoes will be advertised as “in store
only” and should help redirect traffic back to stores while also limiting
unnecessary discounting. As for what is selling well, dress and sneakers
(pony-hair/quilted/perforated etc.) are outperforming sandals, which
have yet to rebound (although the last two weeks have been better).

While SHOO will not cycle the deceleration of booties (i.e., Troopa) until late Q3, we believe the implementation of a
segmentation strategy in the fall will set up 2015 for a resumption of strong double-digit EPS growth. As such, we reiterate our BUY.

Valuation

PT $43 – a blend of 15 x 21-5 earnings, 10x EBITDA and DCF

 

Golf : Market Sector In The Rough

Please refer to our previous update on DICK’s ( posted this week)

The golf industry is in the rough.

Once the go-to activity for corporate bonding, the sport is suffering from an exodus of players, a lack of interest among millennials and the mass closure of courses. The tangled personal life ofTiger Woods, who for years was golf’s biggest ambassador, also hasn’t helped. All that has taken a toll on the companies that make and sell golf equipment, including Dick’s Sporting Goods Inc. (DKS) and Callaway Golf Co. (ELY)

About 400,000 players left the sport last year, according to the National Golf Foundation. While almost 260,000 women took up golf, some 650,000 men quit. A severe winter on the East Coast worsened the situation this year by delaying the start of golfing season for many. Slow sales of clubs and other gear dragged down results for Dick’s this week, sending its stock on the worst tumble since the retail chain went public in 2002.

“Golf is in a bit of a drought,” said Allen Adamson, managing director at brand consulting firm Landor Associates in New York. “It’s a pretty high-price sport, and leisure time is getting crunched.”

Slow golf sales over the past 15 months created a glut of golf inventory at wholesale and retail outlets, forcing them to slash prices. Dick’s is selling some drivers for $99 that were priced at $299 just 20 months ago, Chief Executive Officer Ed Stack said this week on a conference call. Golf sales missed Dick’s target about $34 million in first quarter.

Photographer: Ramin Talaie/Bloomberg

 

“We don’t feel we’ve found the bottom yet in the golf sales number,” Stack said.

Deep Discounts?

The bleak outlook rippled through the golf industry. Shares of Callaway, a Carlsbad, California-based maker of golf clubs, tumbled 9 percent to $7.60 on May 20. Callaway, which sells the Big Bertha driver, had delivered its own dim forecast last month. The company warned that full-year profit could come in at the low end of its previous guidance, especially if discounting is heavier than expected.

“We anticipate a heavy promotional environment while the industry works through excess inventory,” CEO Chip Brewer said on a conference call in April. The company hasn’t reported an annual profit since 2008.

TaylorMade, the Adidas AG-owned brand that makes clubs and golf accessories, also is suffering. The business saw a 34 percent sales drop in the first quarter, Adidas said earlier this month. Still, not all golf equipment is in decline. Overall, manufacturers’ sales rose 1.2 percent last year, according to the Sports & Fitness Industry Association. While sales of golf balls fell 4.9 percent, clubs grew 4.2 percent.

Younger Generation

Though cold weather and the sluggish economy are providing temporary headwinds, a generational shift may be a bigger cause for concern. The sport is suffering the biggest decline from younger players, according to the National Golf Foundation, with 200,000 players under 35 abandoning the game last year.

“Everybody’s hooked up to their handhelds, so it’s social networking instead of sports,” said Gerald Celente, publisher of the Trends Journal in Kingston, New York. The motivation for wannabe executives to spend hours chasing small balls no longer exists, he said.

“It’s something that’s associated with boom times,” he said. “Most of society’s not moving up, and golf is associated with moving up.”

Woods, 38, helped draw younger players to the game, though his personal challenges may have reduced his influence. He divorced his wife of four years in 2010 after admitting marital infidelity and has suffered a series of injuries.

Fewer Courses

There also are fewer places to play golf these days. Only 14 new courses were built in the U.S. last year, while almost 160 shut down, the National Golf Foundation said. Last year marked the eighth straight year that more courses closed than opened.

The people sticking with the sport are playing fewer rounds than before, often opting for nine holes rather than 18. In total, U.S. golfers played 462 million rounds last year, according to Golf Datatech. That was the fewest number since 1995.

“Golf has been a crummy business for a long time,” said Paul Swinand, an analyst at Morningstar Inc. in Chicago.

Dick’s Sporting Goods UPDATE

DKS : NYSE : US$43.60

HOLD 
Target: US$49.00

Consumer & Retail — Footwear and Apparel
STEPPING TO SIDELINES AS GOLF WILL TAKE TIME TO BOTTOM OUT;
DOWNGRADING TO HOLD, $49 Target Price
Investment recommendation
On the back of disappointing Q1 results (1.5% comp/50c in EPS vs. our
4%/54c estimate) coupled with its reduced 2014 outlook, we are
downgrading DKS to HOLD from Buy and lowering our price target to
$49 from $67. The Q1 issues driven by poor performance in golf (-HSD)
and hunting (guns/ammo) are expected to persist through year end.
Moreover, current Q2 trends have continued to soften as golf is comping
down low teens while hunting is down high teens, resulting in a ~4.5%
comp headwind. Hunting faces tough but easing comparisons through
year end. DKS believes golf clearance activity will be confined to Q2, yet
we are less optimistic and believe markdowns could spill into 2H14.
What’s more troubling is the lack of visibility in golf and when it will
bottom out. While the 18% decline in the stock appears excessive, we
believe it will take time for DKS to recover its comp momentum, and
thus believe the shares will trade sideways until we see evidence of
stabilizing golf and hunting trends.
Investment highlights
 To combat negative traffic, the company will increase its
promotional cadence and advertising. As a result, Q2 guidance (62-
67c vs. our prior 83c est.) came in dramatically below our estimates.
On the positive side, athletic apparel/footwear and team sports did
well as the rest of the store comp’d up 6.6%.
Valuation
Our $49 target is a blend of 15x 2015E EPS, 8x EBITDA, and DCF

CLUBBED BY GOLF: DOWNGRADING TO HOLD
We are downgrading DKS to HOLD from BUY. While DKS is a best-in-class retailer, we
believe there are both structural headwinds the company faces in golf and cyclical
headwinds in hunting (guns/ammo) that will result in depressed comps for the balance of
the year, mitigating the strength of other categories such as athletic footwear and apparel.
As such, we believe it is prudent to step to the sidelines as right-sizing these
underperforming categories will take time, particularly as DKS works through excess golf
inventory and demand resumes. Our price target goes to $49 from $67.
In search for a bottom in golf
The issues with the golf category (~15% of the business) are two-fold. First, the
combination of persistently cold weather in Q1 coupled with a glut of inventory in the
channel depressed replacement purchases in Q1. As with any category in which there is a
build-up of excess inventory, DKS has begun discounting and believes it can work through
the excesses in Q2. That, however, is creating incremental pressure on pricing (AUR was
-16% in Q1 and units were -2%) as the discounting of older inventory is skewing demand
toward older inventory at the expense of newer technologies. Management suggested the
consumer does not understand the technological benefits the new clubs have. While that
might be true to some extent, we believe the customer is more heavily skewed by price. We
expect this negative cycle to persist through year end as inventory issues (and potential
margin pressures) always take longer to clear out than initially believed.
Second, structural concerns around the decline in rounds played are also troubling given
the sq. ft. allocated to the category (~8% of store sq. ft.). What’s more disconcerting is that
management does not know where the bottom in golf is. While we appreciate the candor, it
is nonetheless troubling to hear. To date, DKS remains committed to the golf category but
is actively reducing the sq. ft. allocated to it in-store in favor of women’s and youth
apparel. We support this decision; however, it may not be enough to fully offset the
declines.
Hunting facing a year of tough comps
Hunting, and more specifically guns/ammo (~15% of business), is facing difficult
comparisons this year due to the acceleration in purchases over the last couple of years
that were driven by fears of potential legislative changes to gun ownership laws. While this
appears to be more of a cyclical issue than anything else, it remains a headwind for the
balance of the year.
2017 goals likely get pushed out one year or more

Retail Stocks To SELL

Sell These  Stocks Immediately

Struggling Retailers

These retailers can’t seem to get their reluctant customers to open their wallets these days. When they do, they want big discounts. That makes it difficult for the companies to achieve real earnings growth in the current environment

Children’s Place Retail Stores (PLCE) has a tough road ahead as it tries to compete with improved discount children’s merchandising from Wal-Mart (WMT), Target (TGT), J.C. Penney (JCP), Sears (SHLD), and even Costco (COST). Children’s Place is also susceptible to higher cotton prices and then there’s the danger of discounting to move inventory, which eats away at margins.

Radio Shack (RSH) is another business struggling with competition from giants like Amazon and Best Buy (BBY). The company met analysts’ expectations in its fourth-quarter report, but that came on the heels of four straight earnings misses. Part of the problem is that a higher percentage of the company’s sales have come from mobile products, which carry very low margins, and changes at Sprint have also impacted results.

Ralph Lauren (RL) has cheap lines, such as Denim & Supply, which will dilute the brand and bring down sales. Also, many customers have complained about this season’s merchandising/styles.

There’s a lot of moving parts in perhaps the company’s most important division right now, and I would stay away from the stock until there’s a clearer picture of where the company is going.

Sales and profits at Sears Holdings (SHLD), which also owns Kmart, just keep dropping. With poor customer service and concern about the quality of their appliances and other one-time A-level items, the retailer is on a bad downward path.

Analysts and traders have speculated about the fate of SHLD since Lampert combined Sears and Kmart in 2005, and investors have endured wild swings in the stock. Ultimately, I see Sears as unable to make it.

CEO Eddie Lampert has been scrambling to raise cash and calm investor fears, and he does have a history of temporarily igniting investor interest from time to time. To stay afloat with enough cash flow, Sears has been trying to sell off or spin off its stores. One well-respected Wall Street analyst called the process “a controlled liquidation of its chain,” and I agree. The chain plans to sell 11 stores and spin off its Sears Hometown among other efforts that are expected to add about $1 billion to the company’s coffers.

While the move put rumors of bankruptcy to rest, Sears, in the end, looks on a path to fall short of money again. After all, it was only two months earlier when it secured $350 million by closing up to 120 Kmart and Sears stores and reducing inventory. You can’t run a business by selling off assets. Sears needs to address fundamental problems and find a buyer that can provide synergistic upside.

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