September 2, 2019 BARRON’S M5
growth falls as buybacks decline, stock valua-
tion multiples will likely fall, too—bad news
for these companies, which trade for 20 times
2020 earnings, on average.
So what is safe? It looks like old tech are
the new consumer staples. Apple (AAPL)
and Microsoft (MSFT), for instance, have
lower share counts after buying stock back
over the past three years, but still have more
cash than debt. What’s more, they trade for
about 20 times estimated 2020 earnings, on
average—about the same as P&G, Mondelez
and Lilly—yet grow profits at a faster rate.
There are myriad risks for investors to con-
sider when economic growth wanes. But they
shouldn’t forget that buybacks, an old friend,
could end up biting them, too. —ALROOT
Retail’s Bargain Bin
As second-quarter earnings season winds
down, the retail sector continues to split
into winners and losers—and not always
where you would expect.
In recent quarters, the winners have
been chains that offer consumers a distinct
value proposition or that make shopping par-
ticularly easy, online or in person. The trend
toward convenience and low prices has ele-
vated discounters and big box stores, but left
other retailers in a riskier position, having to
continually prove themselves—or else.
Best Buy (BBY), for instance, fell 8.8%
on Thursday, even after reporting better-
than-expected earnings. The problem was
that growth in sales at stores open at least
a year fell short of expectations, while
results were weak in key categories such
as gaming. Investors chose to overlook a
surge in appliance sales, a trend that’s
probably unsustainable because Best Buy
competes with Walmart (WMT) and
Target (TGT) in that category. And tariffs
could cause a particularly big headache for
the chain: Imports from China account for
60% of its cost of goods, Wells Fargo ana-
lyst Zachary Fadem estimates. No wonder
Best Buy lowered the upper end of the
range of sales it forecast for the full year,
implying that it might face challenges in
the holiday season.
Other specialists have also struggled.
Tiffany (TIF) wobbled on Wednesday after
management reported higher earnings than
expected, but said that the pro-democracy
protests in Hong Kong had disrupted busi-
ness there. The shares ended the day
higher, but are up just 6% for the year.
Ulta Beauty (ULTA), which we recom-
mended in this space last week (and wish
we hadn’t), tumbled nearly 30% after miss-
ing earnings forecasts and lowering its
guidance. “For a company that has been one
of the most consistent models across our
universe over the past five-plus years, to-
day’s results were about as shocking as one
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could imagine,” Wells Fargo analyst Ike Bo-
ruchow wrote on Thursday. He downgraded
Ulta to Market Perform from Outperform.
Discounters, however, continue to im-
press Wall Street. Dollar stores and their
ilk have proven they can flourish in good
times and bad, and continue to expand.
“Against a somewhat volatile consumer sec-
tor backdrop, we see increased investor
appetite for recession-resistant and defen-
sive stories,” wrote Credit Suisse analyst
Judah Frommer. Five Below (FIVE) was
up 5.2% Thursday afternoon, even though
same-store sales fell short of analysts’
expectations. Also on Thursday, Dollar
General (DG) reported results that were
much better than expected, sending the
stock up 10%. Burlington Stores (BURL),
another Barron’s pick, soared 18%.
Investors have been impressed with how
the discount chains are managing looming
tariffs. All rely on China for their goods, but
have been rethinking their supply chains.
“We’ve negotiated price concessions, can-
celed orders, modified specs, evolved prod-
uct mix, and diversified vendors,” says Gary
Philbin, CEO of Dollar Tree (DLTR), which
fell 1.2% after reporting mixed earnings.
Among its peers, Dollar General is likely
to weather the storm best. It doesn’t obtain
as many goods from China.
“We believe Dollar General is uniquely
positioned, relative to most retailers, to
manage these tariffs for three reasons,”
wrote Guggenheim analyst John Hein-
bockel. “One, it operates with a sales mix
heavily skewed to consumables—75%—that
are not subject to China tariffs. Two, we be-
lieve it has healthy comp momentum—3% to
4%—with which to leverage most operating
costs. Three, it will cycle significant promo-
tional investments in the fourth quarter,
which should bolster profitability in the
most important period of the year.”
In retail, the best bets are still in stores
offering the best bargains. —AVISALZMAN
Industry Action
**Performance of DJ U.S. Ind, ranked by wkly % chg.***
Basic Materials 3.42%
Industrials 3.33
Technology 3.00
Oil & Gas 2.88
Consumer Services 2.86
Financials 2.76
Telecommunications 2.54
Health Care 1.98
Utilities 1.83
Consumer Goods 1.78
*ForbreakdownseepageM36. Source:S&PDowJonesIndices
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