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If you follow the retail sector, recent headlines are probably making you dizzy. The culprits are many and well known: there’s the overall mall crisis and the Amazon “situation.” Then there are those pesky disruptor whippersnappers who’ve taken a pickaxe to the old school retail model by cutting out the middle man. In turn, they are luring consumers away by giving them what they crave: a more digital, niche experience, making a trek to the local mall seem quite last season. But if you’re an investor, these sometimes murky retail waters can prove frightening, or daunting at best. Yet, it doesn’t have to be that way, according to James Gellert, Chairman and CEO of RapidRatings, a firm that assesses companies and assigns them core and financial health scores from one to one hundred.
In a nutshell, a core health score looks forward two-to-three years, providing insight into the company’s efficiency, and measures its long-term viability against industry peers. Financial health ratings look forward one year to provide a window into a company’s resiliency over the next 12 months.
Taking this approach eliminates emphasis on current headlines or last week’s performance as a metric to determine whether or not it’s time to consider bailing on a company. Gellert took a look and shared a few retail names with promising financial and core health ratings. Edited excerpts are below.
Lululemon Athletica (down 18% year-to-date)
It’s a perfect example of a strong company irrespective of what the quarter-to-quarter equity markets may think. It is obviously getting hammered in the stock market for short-term concerns in an industry where people are worried about any negative sign. And despite that, Lululemon’s core health score of 78 and financial health rating of 94 remain both strong and consistent. We don’t get very many companies in the 90s.
Kohl’s Corporation (down 20% year-to-date)
Some companies that are stronger are also going through store closures. There’s a perception that if companies are closing stores, that means they’re in trouble, and that isn’t necessarily the case. There are obviously good strategic reasons for contracting in certain markets or closing less performing or maybe smaller stores. And that may even have an impact in the short term on revenue. But if they have the resiliency and the core fundamental strength to go through that period of rationalizing some locations, they can come out on the other side quite well, and Kohl’s is a good example of that. Kohl’s doing well with a financial health rating of 73 and a core health rating of 64.
Macy’s, Inc. (down 18% year-to-date)
Macy’s is a surprising one. Our financial health rating for Macy’s at 66 certainly suggests they are solid enough and should be able to weather the storm. Macy’s is going through a contraction, with reducing stores and trying to adjust to a more online presence and online competition. The rating suggests that they should have at least a longer period to get that strategy in place. Macy’s has a core health rating of 67.
J.C. Penney (down over 33% year-to-date)
With a financial health rating of 43 and core health rating of 55, they’re recovering to some degree after having gone through a three-to-four year ratings lull. They’re showing signs of improvement across a whole number of categories. Liquidity has improved, they have become slightly more profitable, their cost structure efficiency and operating profitability have improved. They still have a lot of weak resilience indicators. Leveraging is still an issue, and earnings performance is still a concern. But with any company that’s gone through a restructuring and a cost reduction program, I’d say there are three phases: 1) corporate soul-searching and strategy realignment (cutting costs through store closings), 2) executing, 3) crossing fingers it worked. Phase 2 and 3 blend into one another timing-wise, and J.C. Penney is fully into Phase 2 and scrambling to get to 3.