Another busy holiday shopping season has come and gone. There were winners and losers in this annual rite of passage. But it's time to turn the page on 2012; to make way for an even better year in 2013. Which retail stocks should we look to for the big headlines in the coming year? There are several. Here are my three retail stocks to watch in 2013.
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Best Buy (NYSE:BBY)
While I'm not about to suggest the electronics retailer will go bankrupt in 2013, its cash levels have dwindled in the past year. Merrill Lynch analyst Denise Chai points out that Best Buy had just $309 million in cash at the end of October, down significantly from $2.1 billion a year ago. Its free cash flow (FCF) at the end of Q3 was negative $643 million compared to $1.32 billion in Q3 2011. That's a decline of almost $2 billion in FCF over four quarters.
With its business deteriorating on a daily basis, it's going to be difficult for CEO Hubert Joly and CFO Sharon McCollam to find a buyer who'll be able to secure the financing to float this sinking boat. Joly is a turnaround artist hired from Carlson Hospitality, parent of TGI Friday's and Radisson Hotels. He quickly hired McCollam who was both COO and CFO at Williams-Sonoma (NYSE:WSM) until abruptly retiring in March 2012 at the age of 48. McCollam brings to Best Buy an ability to right-size its cost structure. At Williams-Sonoma, she became one of the retail industry's best CFOs. I've always been impressed by its ecommerce platform, which generates approximately 40% of its overall business. Since it's becoming less likely that founder Richard Schulze, who owns 20% of the company, is going to successfully bid for the rest, Joly and McCollam are going to have to figure out how to generate more online revenue which will help up the margins. Whatever they do, they'll have to work fast. Another year like 2012 and its dividend could be cut substantially.
If anyone can turn this beast around, it's the two people who are at the helm. Does it mean they will? Not at all. But I do think they've got a fighting chance. If its stock falls any further it might just be a good speculative buy. Just don't bet the farm.
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The Yoga Wars
As we move through 2013, the competition between lululemon (Nasdaq:LULU) and Gap's (NYSE:GPS) Athleta brand will really begin to heat up. By the end of 2013, Athleta will have 50 stores offering the same quality product lululemon does at a much cheaper price. Furthermore, as lululemon expands beyond its traditional athletic wear into lifestyle wear, it's going to butt heads with a lot more competition. Nike (NYSE:NKE) and Under Armour (NYSE:UA) are not going to sit idly by and let the Vancouver-based company walk into its territory without a little smack down. That's not to say lululemon isn't the real deal, because it is. It's just that the easy part of its expansion is over, and now it has to replicate its stores outside North America with the same success it's experienced in Canada and the United States. That's not going to be easy, especially when distracted by a well-funded competitor in Athleta.
While lululemon continues to gain the attention of investors and consumers alike, Athleta's probably been one of Gap's least publicized successes in 2012. The San Francisco-based retailer had a banner year in 2012. Earnings per share are expected to be at least $2.20 per share, 47% higher than in 2011. CEO Glenn Murphy has been working on the turnaround for five-and-a-half years, an amount of time that might seem like an eternity, but it's important to remember that it made money throughout the ordeal. Gap tried everything to keep customers coming back, but it turns out that all it needed to do was offer good looking, everyday basics at reasonable prices. Its 1969 denim brand is a prime example. Sure it's had a lot of misfires along the way but Murphy now has a good team in place to drive its global expansion. I look for big things in China in 2013, especially since it's his personal responsibility.
In 2013, you probably won't see Gap's stock price increase by almost double as it did in 2012. However, I think you will see a gain of 20% or more as its same-store sales growth continues to gain momentum. As for lululemon, I think its comps will begin to slow in 2013 due to increased competition from Athleta, which will translate into its stock achieving its first negative annual return in five years. Let the games begin.
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Its big push into Canada begins in earnest in March and April when it opens 24 stores in the province of Ontario, all but two within an hour's drive of Toronto, Canada's most populated city. From there, it plans to fan out across the country opening at least 125 stores by the end of the year including one in my wife's hometown of Charlottetown, Prince Edward Island. There will be at least one store in all 10 provinces with a majority (75) in Ontario and Quebec. By the time it's finished rolling out all 200 stores by the end of 2014, Target will sees Canada generating $6 billion in annual revenue or approximately $30 million per store.
It's going to put a serious dent in the revenues of other Canadian retailers in 2013. Barclay's issued a report in the fall suggesting Canadian retailers like Joe Fresh and Canadian Tire along with American transplants such as Walmart (NYSE:WMT) and Old Navy are the most likely to suffer from this serious bout of increased competition. In the end, Target's entry into Canada is good for the retail industry, consumers and Target itself. This could be the biggest story in North American retail for 2013.
The Bottom Line
As is usually the case in retail you can expect a lot of fireworks in the coming year.
At the time of writing, Will Ashworth did not own any shares in any company mentioned in this article.