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A Trio of Retail Turnarounds

Can these embattled retail stocks maintain their lofty yields?

Image via Mike Mozart/Flickr CC

Whenever we are looking for good turnaround stocks, one feature that piques our interest is a high dividend yield. A substantial dividend compensates you even if you have to wait for the turnaround to take effect, explains George Putnam, editor The Turnaround Letter.

Moreover, after the stock does begin to move up, the yield will boost your total return. With this in mind, we sifted through the stocks in the S&P 500 Index to find companies with high dividend yields that hold promise for turnarounds and a reasonable likelihood of sustaining their dividends.

Three of the stocks that passed this test are in the retailing sector.

Kohl’s (KSS)

Retailer Kohl’s (KSS) operates 1,157 department stores and several outlets along with its e-commerce website. It emphasizes apparel and home goods, with almost half of its $19 billion in revenues coming from higher-margin private label and exclusive brands.

Like nearly all brick-and-mortar retailers, Kohl’s has struggled with declining sales as online competition accelerates. However, the company is seeing improving traffic to its stores, and its online sales are growing at nearly a 20% rate.

It has a relatively fresh store base due to a combination of recent upgrades and new locations, has committed to a $250 million cost-cutting program and is seeing some success with various new marketing initiatives.

The balance sheet is healthy, the dividend is well-covered by cash flow and management is committed to sustaining its dividends, which have increased every year since their 2011 inception.

L Brands (LB)

Founded by retailing legend Leslie Wexner in 1963 as “The Limited,” L Brands (LB) operates intimate apparel retailer Victoria’s Secret, Bath & Body Works and other well-known brands through over 3,000 stores worldwide.

Despite its great brands, sales have been declining, with recent same-store sales down 8%, as online competition is strong and mall traffic is slowing. Declining revenue has brought declining profits and a sharply lower share price, down 60% from its late 2015 peak.

Some rays of light: inventory management is improving, Bath & Body Works is healthy, online sales are growing smartly and management says that 99% of their stores are cash flow positive. However, L Brands has some work ahead to redefine its merchandising and marketing strategy.

The special, one-time dividends, which were $2/share last year, are not likely to recur. The $2.40/share regular annual dividend, which produces the 6.6% yield, looks sustainable for now, but potential investors should be aware that most of the company’s free cash flow now goes to pay this dividend.

Macy’s (M)

Shares in this high-quality department store company have been hit hard by weak revenues and profits as shoppers migrate toward the internet.

The new CEO (since March) has started to put his mark on the company, including hiring an eBay executive with digital and operating expertise and unifying all merchandising functions.

Macy’s (M) continues to close its traditional stores and to develop new opportunities like its Backstage outlets and Bluemercury spa and beauty offerings. Macy’s is also making progress in reducing its debt load.

The company has a tremendously valuable portfolio of real estate and produces sizable free cash flow, and so its dividend looks sustainable for some time. While the operational turnaround could take a while, Macy’s is paying investors a very generous dividend yield to wait.

George Putnam is editor of The Turnaround Newsletter.

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