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Bull's Eye the dog, the mascot of Target chain stores, arrives at the red carpet of the 2008 Billboard Latin Music Awards in Hollywood, Florida, April 10, 2008. (CARLOS BARRIA/REUTERS/Carlos Barria)
Bull's Eye the dog, the mascot of Target chain stores, arrives at the red carpet of the 2008 Billboard Latin Music Awards in Hollywood, Florida, April 10, 2008. (CARLOS BARRIA/REUTERS/Carlos Barria)

Retail

Investing in the U.S. retail invasion Add to ...

It's no mystery why U.S. retailers are expanding into Canada. The economy here is relatively strong, consumers are in relatively good shape (despite nagging debt levels), and our retail space is still relatively new territory for all but a handful of U.S. store operators. Canada offers these retailers a nearby market where there's room to grow - something that's become harder to accomplish within the confines of the crowded and economically strapped U.S. market.

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"It's a reflection of the U.S. being over-saturated with retail," said Travis Williams, retail analyst at Stephens Inc. in Little Rock, Ark.

As many of these companies introduce themselves to Canadian consumers, they will also be raising the profile of their names to a different kind of buyer - the Canadian investor. As we will soon be able to shop at their stores, we decided to do a little window-shopping of their stocks, to see if we could spot anything we like.

Target Corp.

Number of stores: 1,750 Market capitalization: $38.8-billion (U.S.) Stock price (Jan. 31 close): $54.83 One-year price change: +6.9% Forward 12-month P/E*: 14.0x

Target, the Minneapolis-based department store chain, recently inked a $1.8-billion deal to buy up the leases for up to 220 Zellers locations.

Target's stock is rated a "buy" by 21 of the 27 analysts who cover it, according to a Bloomberg survey. Analysts like the stock's valuation and the company's strong cash-flow generation relative to its peers.

"We think the stock is attractively valued," said analyst Colin McGranahan of Sanford C. Bernstein & Co. in New York, who calculates the stock is trading at a modest 12.5 times his 2011 earnings forecasts.

Analysts also like Target's prospects for going head-to-head in Canada with Wal-Mart Stores Inc.

"We believe that [Target]will be a more formidable competitor to [Wal-Mart] than Zellers, which was notorious for poor execution," said Janney Capital Markets analyst David Strasser in a recent report.

Target's move into Canada represents its first expansion outside the U.S. - which suggests it may have more upside than Wal-Mart to grow internationally.



Wal-Mart Stores Inc.

Number of stores: 8,800 Market capitalization: $199.7-billion (U.S.) Stock price (Jan. 31 close): $56.07 One-year price change: +4.9% Forward 12-month P/E*: 13.8x

Wal-Mart is already well-known in this country, with 323 Canadian stores. The Bentonville, Ark. giant announced plans last week to open 40 more super-centres this year.

Analysts polled by Bloomberg are generally positive on the stock, with 23 out of 34 rating it a "buy". Only one analyst has a "sell" on the stock. They feel the bargain chain is positioned to perform well in the early stages of the expected U.S. jobs recovery, and they like its exposure to non-U.S. markets, which account for almost one-third of its sales.

"It really has everything we look for in a company - high return on capital, strong balance sheet, strong brand," said Murray Leith, director of research at Odlum Brown Ltd. in Vancouver. "And it has growth that's under-appreciated."

"People paid way too much for this stock a decade ago," he said, noting that it had a price-to-earnings ratio north of 50 during the market bubble of 2000. As a result, the stock has been moving sideways for years even as the company has grown - which has brought the P/E down to more palatable levels.

"The stock has outperformed a lot of the market in the past year - mostly because of an attractive valuation," he said.



Express Inc.

Number of stores: 570 Market capitalization: $1.5-billion (U.S.) Stock price (Jan. 31 close): $17.40 Price change (since May, 2010 IPO): +2.4% Forward 12-month P/E*: 12.9x

Express, a former unit of Limited Brands Inc., is looking at opening up to 100 stores in Canada, though only a dozen or so of those look likely this year. The retailer, which made its initial public offering last May, has been flying under the radar, with only nine analysts tracking it - and it may be undervalued as a result.

"I think it's a great brand," said Travis Williams of Stephens Inc., one of eight analysts who rate the stock a "buy" (the one remaining analyst rates it a "hold"). "It kind of suffered a little under Limited - it took a back seat to Victoria's Secret and some other brands."

Mr. Williams said Express has positioned itself as a "one-stop shop" for clothing for the 20-30 age group, and has been rapidly expanding its online presence, where it got a bit of a late start and still has more room to grow than many of its peers.

"It trades at a pretty significant discount to the group," he said, at a price-to-earnings of about 12 times based on his 2011 earnings forecast. The stock has also been hurt by its debt load - the result of a leveraged buyout by the private-equity owners who liberated it from Limited - but its strong free cash flow generation suggests it could get out from under that debt quickly.



Zumiez Inc.

Number of stores: 400 Market capitalization: $712-million (U.S.) Stock price (Jan. 31 close): $23.22 Price change (since May, 2010 IPO): +82.4% Forward 12-month P/E*: 27.1x

Zumiez, an Everett, Wash., skateboarding and snowboarding chain, tried unsuccessfully to buy Vancouver-based snowboarding retailer West 49 last year. It plans to open an unspecified number of stores in Canada this year.

Zumiez's stock looks the least attractive of this bunch: Only seven of the 21 analysts tracked by Bloomberg rate it a "buy," compared with 13 "holds" and one "sell." Ironically, the company's relatively aggressive expansion plans for 2011 has analysts nervous about the costs.

"We're concerned that its expansion plans in both Canada and the U.S. could weigh on earnings this year," said Betty Chen, analyst at Wedbush Securities in San Francisco.

The cost of expanding could slow an impressive earnings-growth trajectory that had convinced investors to pay handsomely for the stock.

"It's been trading at quite a significant premium," she said, noting that the stock still has a P/E north of 25. She believes something in the 20 area would be "more appropriate."



*based on Bloomberg earnings estimates

 
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