The key to being hedged as much as possible in the department stores, broadline, multiline retailers and supermarkets sector, is to avoid the middle-income consumer as part of a “barbell strategy” by owning the best-performing names at the high end and the low end of the sector, says Charles Grom, a Senior Equity Research Analyst and Managing Director for Deutsche Bank Securities Inc.
“The strategy we try to embrace is to find retailers that have got decent square-footage growth stories, that have got solid comps led by traffic as opposed to ticket; companies that have very good balance sheets, and then on top of that, companies that have got operating margin opportunities,” he said.
Grom favors Nordstrom Inc. (JWN), a high-end department store, which has been up about 13% year to date, and has raised its guidance. He says Nordstrom has inventory levels in control and has reported a healthy second quarter with better-than-expected gross profit margin improvement and comps that were up roughly 3% to 5%. Grom also sees Nordstrom benefiting from the retail trend of department stores trying to capturing the move by consumers to online shopping.
“Nordstrom’s is really the model for that. They’ve done a great job in the past five, six years developing systems and having the back-end infrastructure to satisfy customers’ needs, whether they’re shopping online or shopping in the store,” he said. “They reinforced this with a third development, which is primarily only affecting the high-end names, which are offering discount divisions like Nordstrom Rack line.”
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