Bookkeeping: Starting Big Lots (BIG) - Interested in Walmart (WMT) and Polo Ralph Lauren (RL)

Trying to find a retailer to replace the homebuilder exposure we let go of this morning. The thesis here remains we need exposure to something that works when the "it's time to buy America as the rest of the world implodes" trade is on. Now the funny thing, is in retail most of the stocks doing well, even today, as "rotation" happens are the very low end or higher end - the great middle is still a chasm.

While the usual road kill rallied huge yesterday: Kohl's (KSS), Macy's (M), JcPenney (JCP) I am looking for something with a bit more reality behind it - i.e. will go up on more than "flavor of the day/week" to run up, and something we can hold for a while.

We lost Costco (COST) with its recent warning (but perhaps it formed a nice double bottom), but (similar but not as good as Costco) BJ Wholesale (BJS) seems to be recovering

Walmart (WMT) would be the easy, safe choice - it's been a favorite "Pooring of America" stock for a long time [Jul 2: 3 Muskateers of Pooring of America Retail] [Dec 16: Target Shoppers Turning into Walmart Shoppers] After basing for a few months, it has just broken out to a new high. I am interested and might get into this one soon. (as an aside how is the economy healthy or "will be soon" when Walmart is printing all time highs? Call me when Kohl's is making new all time highs and we'll talk economic recovery) There is not much growth here and a forward PE of 17 but valuation means nothing when the hedge funds want you in their portfolio.


With Costco potentially down (again it could be making a double bottom which is bullish) the other of our 3 muskateers was Big Lots (BIG) which is down today on a downgrade after an impressive 2 week run from the $27s to $34s.

• Shares of Big Lots Inc. fell sharply Wednesday after an analyst downgraded the company on concerns about a run-up in the stock price. Soleil Securities Group Inc. downgraded Big Lots to "Hold" from "Buy" due to the sharp recent appreciation in the shares.
• "There has been no news or developments that we are aware of to cause the run-up in the shares," he wrote in his note. (here is the development - hedge funds are moving in)
  

I'm going to start a position here and use the downgrade and 7% drop today to our advantage (I hope). I was debating adding it a few weeks ago when it fell to the $20s but the chart was giving me concerns - in retrospect all it did was fill "a gap". It seems to have held the 100 day moving average (most retailers are below the 200 day). It has a forward PE similar to Walmart at 17.

We're starting Big Lots (BIG) as a 1.9% stake buying in the $31.90s. I am strongly considering making this a 2 stock basket with Walmart as well....

Last, we have Polo Ralph Lauren (RL) which I have to admit I am impressed with; although most of its strength is in the dreaded "overseas" department (and from favorable tax treatment). After nearly 3 months of faltering, the stock gapped up on quite the earnings report this AM. Today's gap took it over both the 50 and 200 day moving averages in 1 fell swoop. It's a tricky chart and not one I normally buy... if it falls back to "fill the gap" it would break both the 50 and 200 day moving averages ... but if it runs without filling the gap that would raise some concerns. So I might hold off on this one until I see a better direction. If it rises past May's high in the $71s that would be a very good technical sign.

Some reaction to RL's earnings (again the irony is, we are trashing everything with exposure outside the US, yet where is the strength in all these earnings reports coming from? and why is it ok for some sectors to have strength outside the US and not others? boggling)

• Fashion company Polo Ralph Lauren Corp (RL) reported a much-bigger-than-expected increase in quarterly profit and raised its full-year earnings outlook on Wednesday, citing a higher gross margin and a lower tax rate and sending shares up as much as 8 percent.
• Polo's high-end customers are usually less wounded by the weak economy, but conservative planning and the strength of its brands has allowed the company to continue selling its clothes, shoes, handbags and home goods at full price, even as U.S. consumers as a whole are spending less in the face of soaring gasoline and food prices, falling home values and job insecurity.
• The company, whose brands include Polo by Ralph Lauren, Chaps and Club Monaco, said net income rose 8 percent to $95.2 million, or 93 cents per share, in its fiscal first quarter, which ended June 28, from $88.3 million, or 82 cents per share, a year earlier. Analysts on average were expecting 71 cents per share, according to Reuters Estimates.
• The lower tax rate in the first quarter -- 35 percent, down from 39 percent a year before -- added about 6 cents to earnings per share, while a lower share count added a penny or 2 cents, according to Needham & Co analyst Christine Chen.
• Even when stripping out those benefits, Polo delivered "an amazing beat ... in any environment, let alone this environment," Chen said. "They're one of the best operators out there. They managed their inventories very, very leanly so they didn't have to be as promotional as they thought they would. Business held up better than they expected."
• Net revenue rose 4 percent to $1.11 billion, with about half that increase due to the weakness of the U.S. dollar versus the euro, which boosted the value of international sales when converted to U.S. dollars. (egad)
• The gross margin at Polo, which supplies department stores and specialty retailers and runs its own stores, improved 2 percentage points to 57.3 percent in the quarter, due to the strength of international sales, which usually carry higher margins. (this we like)
• "While our new fiscal year is off to a good start, we continue to have a conservative view of the domestic retail environment," Farah said, adding that Polo is "well-positioned" for the upcoming back-to-school and holiday shopping seasons, since its inventory levels have been planned "conservatively."
• Retail sales rose 9 percent to $492 million, driven by a 3.9 percent increase in sales at stores open at least a year, a key retail metric known as same-store sales.
• Polo said it now expects to earn $4.00 per share to $4.10 per share in fiscal 2009, up from a prior forecast of $3.95 to $4.05. Its revenue outlook was unchanged, calling for an increase at a low-to-mid single digit percentage rate. Analysts on average were expecting 2009 earnings of $3.98 per share on revenue of $5.10 billion, according to Reuters Estimates.

This new guidance gives us a forward P/E of 16, falling near the other 2 we are considering.

Long Big Lots in fund; no personal position