Out of Space, Retailers Trim Growth Plans
For years, investors rewarded those retailers with fast expansion rates. Now that some retailers have nearly tapped out their potential in the U.S., investors are punishing them for failing to slow down.
The result is that a number of major retailers are ratcheting back on the number of new stores they open each year and are diverting more of their spending to repurchasing shares and increasing dividends. Among those adopting this strategy are Sears Holdings Corp., Home Depot Inc. and AutoZone Inc.
They and other mature retailers that beefed up their buyback programs have seen their stocks perk up in the past year. Several remain in positive territory despite the market's roller-coaster ride in recent weeks and yesterday's report of a weaker-than-expected 0.1% rise in February U.S. retail sales.
Wall Street's badgering of retailers for more buybacks and fatter dividends is nothing new, but the movement has gained momentum of late because so many big-box retailers nearly blanket the U.S. "There are a greater number of large-cap retailers that have reached the point, domestically, that opportunities for additional square-footage growth are diminishing," said Chris Kagaoan, an analyst with investment firm J. & W. Seligman & Co., which has $20 billion under management and holds shares of Wal-Mart, Home Depot, and Best Buy Co., among others.
Most retailers nearing maturity will see their returns on the capital they spend diminish and their sales gains at established stores weaken. Thus, Wall Street is watching for those tell-tale signs in judging when to begin demanding less growth and more return.
"The rapid growth period for these retailers is over -- with the exception of a lot of niche players -- and now they are generating a lot of free cash flow," Sanford C. Bernstein & Co. analyst Colin McGranahan said. "How they allocate that cash flow is an investment concern."
Even some highly regarded retailers appear to be getting penalized for aggressive growth plans. Best Buy, the electronics retailer, surprised Wall Street on Feb. 21 by announcing that it intends to open 90 U.S. stores in its fiscal year that began March 4, an aggressive 9% expansion. "We view ourselves as a growth business," said Jim Muehlbauer, Best Buy's senior vice president of finance. "We are going to [proceed] opportunistically with our share repurchases."
Best Buy's stock is down 13.6% in the past year. "It's as if the market's already saying to you, 'We don't believe this company can keep the growth going,' " said Mr. Balter, who rates both Best Buy and Circuit City the equivalent of "buy," assigns them 12-month price targets of $59 and $25, respectively. He owns neither stock. Credit Suisse has done business with Best Buy in the past 12 months.
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Hmm
That was a wsj article that I seems to have lost access to right in the middle of reading it
Mish |
