Last week, the most recent earnings reports from retailers inspired a list of companies in that sector that appear to be on a trajectory for growth. The combination of new earning reports and information on long-term capital returns have now inspired a second list. The companies listed are ramping up sales and profits while producing rich capital returns. Return on capital is defined as profit divided by the amount of money that is being employed to produce that profit. Right now, with several well-priced companies that have impressive return on capital, retail seems like a sector worth discussing.
Family Dollar is expected to report earnings on June 29 before the bell. Wall Street is eager to see how the company has been impacted by the increase in commodity costs, which has been especially tough for companies who failed to make adjustments in pricing or whose customers could not withstand the changes. The third-quarter fiscal 2011 predictions by Wall Street analysts are in favor of growth for the North Carolina based chain expected 95 cents per share on $2.2 billion in revenues. This is a modest leap from last year when the company reported earnings of 77 cents per share on $2 billion in revenues.
Family Dollar’s revenue increases are only part of their story; however. The company has been attracting the most attention for the high profile investors, like Bill Ackman, who owns 8.9 percent of the stock. Simultaneously, the Trian fund has been looking to take over the company with a contingent offer of $55-60 per share.
Depending on their upcoming earnings, Family Dollar may be trading below its value, which, like a potential take over, could draw more investors. The company is currently yielding 1.4% and is trading at 14.4 times forward earnings. Should operating costs be reduced, the company, according to Ackman could out perform its competitors
Big Lots (BIG)
The attraction of Big Lots has less to do with the company’s earnings and more to do with the return on long-term capital. Big Lots has a return of 20 percent, and after a decision not to sell the company or a major portion of the shares, Big Lots fell significantly. Investors had pushed Big Lots up over a third this year in anticipation of a sale. The company’s choice to continue on its own did not sit well with many, leaving causing major gains to reverse. In recent trading, Big Lots has a P/E ratio of 11 and with less than promising earnings, sales are expected to be consistent with last year or even decline slightly, it could be even more undervalued. The word undervalued is employed here in spite of the potential minor losses because in the event the economy continues its weakness, sales will climb significantly. Additionally, Big Lots has a healthy balance sheet, no debt and holds 10 percent of total market value in cash.
BJ’s Wholesale Club (BJ)
Months after putting itself on sale, BJ’s has finally agreed to a deal. The company will be bought by Leonard Green & Partners and CVC Capital for $2.8 billion. Shares are climbing today and considering the company is going private, there isn’t much time to act here. Stockholders in the company will be awarded $51.25 for each share they own, 6.6 percent higher than yesterdays closing price but below its 52-week high. Some are arguing that the failure to buy at its high undervalues the company, but for those who bought low or want to buy before closing today will still get good short-term values.
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