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Sterne Agee Lists Six Top Retail 'Stock'ing Stuffers' Into the Holiday Season (ULTA) (COST) (DECK) (more...)

November 24, 2014 11:49 AM EST
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Sterne Agee retail analysts listed their top consumer ideas heading into the 2014 Holiday Season.

In Specialty Retail, analyst Ike Boruchow likes:

  • Signet Jewelers (NYSE: SIG) (Buy). In addition to being one of the most well-run, resilient businesses in our space today, the company has massive accretion potential from the acquisition of rival Zales (which closed just six months ago). The first steps in the Zales turnaround are likely to take shape in Q4 this year, as SIG begins putting its fingerprints on the business for holiday. Specifically, the deal closed in time for Zales to be included in the upfront holiday media buys, which will result in increased TV impressions in Q4 vs. LY. SIG was also able to advise Zales to invest in better turning product, which should help inventory management and markdown optimization during the holiday season. Neither Zales nor Sterling have plans for increased promotions this holiday (following a very promotional 2013 holiday), and thus we believe there should be upside to numbers on both sales and margins in both the near and long term. Reports Q3 results November 25.
  • Ulta Beauty (NASDAQ: ULTA) (Buy). ULTA carries solid momentum into holiday, as traffic has inflected positively and inventories are well managed (relative to LY when inventories were heavy and traffic was trending negative). Specifically, we view our comp estimates of 7.5% and 6.0% in Q3 and Q4 as conservative, as new products (i.e. IT brushes), new brands (i.e. Mally) and product extensions into the seasonally important fragrance category (Armani Code, Michael Kors Sexy Amber, and Marc Jacobs Daisy Dream) should all help drive sales upside. Last, we remind investors that 100% of loyalty members are now on the points-based system (vs. 50% in holiday LY), so ULTA can better utilize its CRM capabilities to target market shoppers this holiday. Reports Q3 results in early December.

In Broadlines, analyst Chuck Grom likes:

  • Five Below (NASDAQ: FIVE) (Buy): We like the setup here on shares of Five Below. Two points: First, in the NT, cycling LY's Rainbow Loom supported 9.0% comp in 3Q (EPS in early December) should position the stock favorably, as FIVE will then be lapping just a 0.3% comp from LY when unfavorable December weather in many key markets paralyzed sales. Recall that 4Q sales are ~1.9x larger than 3Q (4Q EPS is 70% of FY EPS) and with many lateral players (DLTR, TGT, WMT) speaking to more favorable trends in recent weeks. We believe FIVE will also endorse favorable 4Q commentary (and likely guide to 4-5%). Second, FIVE is the best unit growth story in our group with multiple years of 20-25% unit growth and a LT target of 2,000 stores (vs. ~365 today). With under a one-year cash-on-cash return per store investment, the FIVE model is “transportable.” All told, with sentiment guarded and a solid NT and LT story, we like FIVE into the holidays.
  • Costco Wholesale Corp (NASDAQ: COST) (Buy). A solid 4Q print back in early October followed by a robust 6.8% Core SSS for the same month has led to a nice pop in COST shares of late, with COST rising ~12% vs. a ~6.0% increase in the S&P since 10/7. Despite this recent move, we continue to like the name as we approach year end. To this point, we see the holiday season as an opportunity for Costco given some missteps a year ago and expect the recent top-line momentum to continue in coming months. Favorably, Costco cycles two of its easier core compares from last year in November and December (4.0% and 5.0%, respectively) vs. a 12-month trailing average of 5.7%. Additionally, the downturn in gas prices over the past few months is a significant positive for margins and should help to defray the impact from FX headwinds. Finally, the stability/consistency of the Costco business model driven by: (a) industry-leading 4-5% traffic trends and (b) its annuity-like membership fee income stream (~90% of EBIT $) make it an important core holding over the long haul.

In footwear, analyst Sam Poser likes:

  • Deckers Outdoor (NASDAQ: DECK) (Buy). While it's a bit early to judge the season, UGG boots are said to be performing well by a number of retailers. The recent colder weather has likely jump-started the UGG business going into holiday. UGG launched its holiday marketing campaign on November 17. The guidance provided on the 2Q call is only counting on a normal winter, not the blizzard-infested winter of last year. The implementation of UGG Pure has helped in creating a compelling mix of updated fashionable UGG footwear, with a far better value proposition than last holiday season. The early reads on the new fashion goods have been positive. Not only do we expect SSS in the UGG retail stores to exceed the -0.8% guidance, but we also expect to see high single-digit increases in the UGG wholesale business due to a healthy reorder cycle.
  • Foot Locker (NYSE: FL) (Buy). FL guided 4Q14 SSS to be up MSD and EPS to grow DD. SSS through November 20 were up LDD (versus up MSD for the same period in 2013). The Lebron XII "NSRL" and Air Jordan 13 "Grey Toe" will launch in 4Q in 2014, while the comparable shoes were launched in 3Q in 2013. We believe that shift of launches from 3Q to 4Q will provide an incremental 100bps-150bps of SSS to 4Q14 results. We are forecasting SSS of +6.0% in 4Q14 compared to +5.3% SSS in 4Q13, though there may be upside due to the shift of key product launches and ongoing strength in women's and kids' footwear. The pipeline of launches from Jordan, Lebron, Kobe, and KD slated for the next six weeks is strong. In addition, FL's "The Week of Greatness" campaign, featuring 30-second commercial spots from six athletes, will kick off on November 22. There will be 11 releases from top brands between November 22 and 29.


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Sterne Agee, Standard & Poor's, Definitive Agreement, Sam Poser, Chuck Grom, Ike Boruchow