Buy This, Not That: Sears versus L Brands

It’s no secret that the American consumer is driving the U.S. economic recovery, and some retailers stand to profit in a considerable way.

However, the January retail sales report from a few weeks ago is proof that not all retailers are benefiting equally from recent increases in consumer spending. Consumers are definitely out and about spending, but the spending patterns have been sporadic. While consumers have more money in their pockets, they just cannot make up their minds on where to spend it.

So today let’s look at two major apparel and home goods retailers—Sears and L Brands—and see which is a screaming buy at current prices, and which should be avoided at all costs.

Sears Holdings Corp. (SHLD) is a retailer that operates in the United States and Canada. The company’s brands include Kenmore, Craftsman and DieHard. The company also owns Kmart, which sells brands like Joe Boxer and Jaclyn Smith. Sears has over 1,700 full-line and specialty retail stores in the United States and in Canada. The company brought in $31.2 billion in revenue last year, a $5 billion decrease over 2013.

SHLD sold off today following its fourth-quarter earnings announcement. While the company narrowed its net loss to $159 million, and Sears beat earnings expectations, it continues to struggle with sales. Compared with Q4 2013, net sales plunged 24% to $8.1 billion, missing the $8.3 billion consensus estimate by a sizeable margin. During 2014, Sears had to close 234 underperforming Kmart and Sears full-line stores.

Sears has fallen behind the competition thanks to a lack of innovation and the fact that its customer base was hit harder than usual by the slow economic recovery. So with such a lackluster earnings announcement, investors are still leery of SHLD. SHLD is a C-rated Hold, at best. Then again, once the latest earnings results are plugged into Portfolio Grader, I wouldn’t be surprised to see the stock get downgraded back to a sell.

L Brands Inc. (LB) is a specialty retail company that operates roughly 2,975 stores throughout North America under the Victoria’s Secret, PINK, Bath & Body Works and La Senza (Canada only) brand names. The company also has a robust online and catalog sales business. L Brands was formerly known as Limited Brands and changed its name in March 2013. Originally, the company focused on apparel, operating two clothing store chains—the Limited and Express—but sold those ventures in 2007 to focus on its core businesses, Victoria’s Secret and Bath & Body Works. L Brands also owns apparel importer, MAST Industries; luxury department store operator, Henri Bendel; and The White Barn Candle Company.

Both Victoria’s Secret and Bath & Body Works have become popular mainstays in shopping districts and malls across the country. This was reflected in the company’s fourth-quarter results. Compared with the year ago quarter, profit jumped 15% to $564.8 million, or $1.89 per share. Analysts were expecting $1.80 EPS so L Brands posted a 5% earnings surprise. Over the same period, sales rose 7% to $4.07 billion; this also topped analysts’ estimates of $4.03 billion. Meanwhile, same-store sales jumped 6%.

Looking ahead to Q1 2015, L Brands expects earnings of $0.50 to $0.55 per share. For FY 2015 the company is targeting $3.45 to $3.65 EPS. This is a cautious guidance, as the analyst community is calling for $0.62 EPS in the first quarter and $3.83 EPS for FY 2015. Despite the conservative guidance, this was a generally solid report. I consider LB an A-rated Strong Buy.

So if you’re considering adding a retail play, sales and earnings should be at the top of your checklist.

Sincerely,

Louis Navellier

Louis Navellier

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