3 Destinations Retailers Expanding Store Counts - Investment Ideas

By Zacks | August 23, 2012 AAA

3 Destination Retailers Increasing Store Counts

I came across a few tweets last night about what Steve Mandel looks for in a retailer. Who is Steve Mandel you might ask? Well he is the manager of Lone Pine Capital and has been crushing the market for some time now. As the editor of Follow The Money, we followed an investment of his for a quick 5% gain.

What this institutional investor is looking for is a destination retailer that is seeing the demand for more stores. More stores generally means more sales, but in the new age of online shopping is every store a showroom? Not all of them.

The basic problem that many see with Best Buy (BBY) is that it's a showroom for Amazon (AMZN) or other online entities. While BBY is a destination store - meaning that store has the attributes of many stores and has hundreds of similar products under one roof - it's not in expansion mode. In fact, it's in contraction mode and therefore one that is not on my list.

So we want a retailer that is a destination store that gives consumers a reason to travel to come to the store and bypass the idea of Amazon, eBay or other online stores. We want growth in stores that are generally big stores, I am not talking about adding another Subway franchise for a more sales of $5 footlongs.

The first retailer that I fits the bill is Ulta Salon (ULTA) which is currently a Zacks #3 Rank (Hold) stock, but I would expect that ranking to change over the next few weeks. While past performance is not indicative of the future, ULTA has been a Zacks #1 Rank (Strong Buy) or a Zacks #2 Rank (Buy) from September 10, 2011 through August 7, 2012. The last time the stock was a #3, it held that rank for a month before spending the next 11 months as a #1 or #2.

Ulta Salons, based in Bolingbrook IL, is a retailer of beauty products and most of its stores are 10,000 square foot monsters. They set themselves apart from other retailer in the beauty industry by having testers or sample products. The also employ licensed beauticians.

The retailer has 9 million active loyalty users in its rewards program, and solid foot traffic. The average store is 10,000 sq ft. 20,000 sku's in those stores. The current store count is about 467, but management has announced plans to build out the store count to 1,200. The company plans on opening 100 stores in 2012.

My next pick that fits our guidelines is Whole Foods (WFM). The company has recently announced that it is looking to triple its store count from the 328 it reported in the most recent quarter to about 1,000 stores.

The company only opened 15 stores in 2007, but has since picked up the pace of its expansion and will open 22 in 2012. The plan is for the expansion to pick up some steam in the coming years. Its stores range from as small as 25,000 square feet to 70,000 square feet mega stores in Chicago and New York City. The company aims to add stores in the sweet spot of 35,000 - 50,000 square feet.

As the high end grocery store, WFM is a destination store because it offers higher quality food and products. Its produce section alone has been noted as the reason for most of its foot traffic. Whole Foods gives its regions autonomy in purchasing and promotions, which provides greater ability to source local products.

One of the best data points that suggests that there is plenty of room for the higher end grocer came during the 3Q12 earnings conference call. Within 33 minutes of announcing its planned expansion its Facebook page was flooded with over 1200 comments suggesting store locations close to users.

Whole Foods is a Zacks #2 Rank (Buy) stock and has been a Zacks #1 Rank (Strong Buy) or a #2 Rank for most of the year. In fact, it has been a Zacks #3 Rank (Hold) for all of 11 nonconsecutive calendar days this year.

Finally we have a real destination store, when one of these opens, people flock from miles and miles around. Cabela's (CAB) opens a store and people line up around the block. They open super stores of 80,000 to 110,000 square feet filled with outdoor merchandise.

Not only is there a fudge shop and a restaurant in most stores, you can feed the fish and buy a gun. We all need more guns and may I suggest a Smith & Wesson or a Strum Ruger firearm if you are in the market.

The idea of expansion here isn't quite the same as it is for the other two examples, but the growth is consistent. The company has 38 stores as of mid-August and plans to open 7 stores in 2013. Off the small base that is some significant growth. While ULTA and WFM have announced plans to open 3x the number of stores, CAB is moving a little slower. But we all know that slow and steady wins the race.

Cabela's has been a Zacks #1 Rank or Zacks #2 Rank stock for most of the year. By now you are seeing a recurring theme of destination stores that are expanding the number of locations and their Zacks Rank.

It seems that more stores don't always translate into more showrooms.

Brian Bolan is a Stock Strategist
for

Zacks.com. He is also the Editor in charge of the Zacks Home Run Investor
service

Brian is also the editor of Follow The Money Trader

Follow Brian Bolan on twitter at
@BBolan1

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