As Black Friday draws near more stores are announcing that they will start sales early by opening on Thanksgiving itself. American personal expenditure on non-durable goods is slowly going up (see graph below). Despite a slump at the beginning of the year, dollars spent in the early summer showed a positive change of .28%. But American real disposable income per capita is lower than last year. In fact, department stores like Macy's, Inc. (NYSE:M) reported disappointing sales in the last quarter partly due to consumer health. Sluggish sales this year are going to be compounded by the shortest shopping and holiday season possible, a full 6 days shorter than usual because of a late Thanksgiving. Since the holiday shopping season can generate as much as 40% of annual revenues for some retailers, its little wonder then that Retail Trade is banking on Thanksgiving as well as Black Friday to make up for lost revenues.
There is however some good news for Black Friday stocks i.e. stocks of companies that could see a surge in revenue during the holiday season. American Express released a consumer survey that showed that consumers intend to start their holiday shopping sooner and spend $400 more than last year. To capitalize on this almost 800 Macy's stores will open at 8pm on Thanksgiving. Kohl's Corporation (NYSE:KSS) and J.C. Penney Company, Inc. (NYSE:JCP) have also announced they will open on Turkey Day. Wal-Mart Stores, Inc. (NYSE:WMT) and Target Corporation (NYSE:TGT) have already been open previously on the last Thursday in November. Opening a few hours earlier than usual might give a much needed boost to many businesses. Brick and mortar stores will however still need to compete with e-commerce; up until August, retail had only grown around 3% whereas e-commerce sales were up over 8%. A Deloitte survey reveals that 47% of consumers intend to shop online this year for the holidays. Possibly because Black Friday lines and frenzies are well known; consumers have previously smashed doors at Urban Outfitters, Inc. (NASDAQ:URBN) and there have been stampedes in stores.
We examine 3 Black Friday stocks from a fundamental perspective. What does each of these companies have going in its favor as consumer spending continues to increase? All three companies have both brick and mortar stores as well as online channels for shoppers. Analysis Notes: (i) CapitalCube’s analysis is peer-based and in the analysis below each company has been analyzed relative to its peer set (ii) The words median and average are used inter-changeably and refer to the peer median (iii) Readers can access our analysis on over 40,000 companies by registering with us.
Macy's operates under two brands: Macy's and Bloomingdales. It's flagship store in Herald Square, New York is one of the largest stores in the world at 2.2 million square feet. The company began a $400 million renovation project of the store due for completion this November. Macy's is on our list of Black Friday stocks because our fundamental analysis shows that compared to its peers, the company has better control over its costs. In a highly competitive retail season this could be advantageous. Even though changes in Macy's revenues are in-line with its peers (annual revenue changed by 4.9%) its earnings performance has actually been better — its annual earnings changed by 6.3% (compared to the average of 2.4%). The department store chain currently manages to convert every 1% of change in revenue into 1.3% of change in annual reported earnings. Our analysis also shows that the company's recent returns have improved versus the last five years (see the graph below). Macy's current return on assets is 6.6% (the same as its peers). This recent performance contrasts with its less than peer median return on assets over the past five years (-0.3% versus the average of 3.9%). The company's relative operating performance seems to be improving.
Urban Outfitters, Inc. is a lifestyle retail company, which operates retail clothing stores as well as a wholesale division. The Retail segment consists of Urban Outfitters, Anthropologie, Free People, Terrain, Leifsdottir and BHLDN brands, whose merchandise is sold directly through stores, web sites and other channels. The Wholesale segment consists of Free People division. Urban Outfitters attempts to achieve high profit margins (currently 9.0% vs. 6.5% on average ) through differentiated products. It currently operates with peer average asset turns of 1.5x. The company also supports growth; in the past three years its annualized rate of change in capital (1.5%) is higher than average (-1.0%) and this investment has generated an above average return on capital for Urban Outfitters (18.2% in the same period). This is evidence that the relatively high capital investment has been successful given the relatively strong growth in its returns. Finally, it also seems as if the market sees faster growth ahead for the company (see graph below). While the company's revenues growth has been around average in recent years (13.0% vs. 12.1% peer average for the past three years), the market gives its shares a higher than peer median PE ratio of 21.2. For all these reasons Urban Outfitters is on our Black Friday stocks list.