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Which Three Retail Names Are Hedge Fund Managers Bullish On?


Gildan Activewear, Kohl's, and JCPenney are favored at the Ira Sohn investment conference.

MINYANVILLE ORIGINAL While there was little surprise at last week's Ira Sohn investment conference, some of the world's top hedge fund managers still offered compelling cases for investment ideas.

Among the 14 speakers who presented, just about every industry was covered, including, of course, the retail sector.

Here are three of the retail stocks that top investors at the Ira Sohn conference are bullish on.

Gildan Activewear (GIL)

Meryl Witmer, a general partner at Eagle Capital, said her investment idea was apparel company Gildan.

"I would hazard a guess and say that most of you have purchased their product, but probably never noticed the Gildan tag on them," she began before pointing out that Gildan makes basic apparel that is later sent to screen-printers for customization before it reaches stores. As such, the company gets to enjoy massive markups.

"That shirt with the Nike swoosh you pay $30 for costs less than $2," Witmer quipped, and praised Gildan for being "the lowest cost producer in the industry with the most advanced manufacturing facilities.

Witner said that Gildan's earnings were depressed, but not permanently, because of a spike in cotton prices last year. Noting that the company's market share has grown to 70% from 10% in 1998, she said that Gildan is now trading at less than 10-times after-tax cash flow, and asserted that its stock is worth $38-$50 per share.

Kohl's (KSS)

Steven Mandel of Lone Pine Capital said that his firm likes moderate growth companies that use their free cash flow, or FCF, to buy back shares. He calls them "share count shrinkers." 20% of his portfolio is in these companies.

An ideal example of that is Kohl's, which cut its share count by 15% last year, and which should drop by a further 8%-10% this year. Now that Kohl's has become a national retailer whose sales exceed those of primary competitor JCPenney (JCP), Mandel said, expansion opportunities have become limited. As such, the company is putting its attention towards improving existing stores and its online presence, slowing expansion down to 2%-3% annually.

Mandel explained that the stock's relatively low price currently was the result of poor decisions made by Kohl's management when cotton prices inflated last year.

"Retailing is all about leadership, and Kevin Mansell is a strong and experienced CEO. Even assuming a successful turnaround at JCPenney, Kohl's should be able to grow its market share from weaker department store chains. Comp store sales should begin to rebound in the second half of 2012 as pricing and inventory errors are corrected," said Mansell.

"We see Kohl's earning north of $5.50 a share next year. You do not need much of a multiple to get a very nice return from here. And, you have a very large share count shrink working for you and helping to protect your downside."


JCPenney reported a disastrous quarterly loss of $55 million, or $0.25 per share, last Tuesday, missing analysts' expectations of a loss of $0.11 per share by a wide margin. The company cut its dividend and lowered its outlook, and its stock plunged in response.

Nonetheless, hedge fund powerhouse Bill Ackman believes the stock is worth a buy, which perhaps shouldn't come as a surprise given that his company, Pershing Square, has an 18% stake in the retailer.

Ackman explained that the "company isn't fundamentally broken," and that CEO Ron Johnson, who previously worked wonders at Apple (AAPL), "was the best guy to run the company."

Under Johnson's leadership, Ackman pointed out that JCPenney is making dramatic changes to cut costs, boost profitability, and change public perception of the company. For example, Johnson has cut out JCPenney's reliance on coupons and special deals, replacing them with more stable and straightforward pricing. Merchants can thus concentrate on product, not promotions.
Another strategy of Johnson's Ackman likes is the plan to turn JCPenney into a "mall within a mall," where brands like Nike (NKE) and Levi's will have small boutiques inside JCPenney. The billionaire investor likes this strategy because currently, the retailer reports sales of about $130 per square foot in malls while specially store brands can rake in up to $300 per square foot, so if the "mall within a mall" concept can come close to those numbers, JCPenny's stock could rise as high as $77 to $125, and earn $6.00 per share by 2015.

Twitter: @sterlingwong
No positions in stocks mentioned.
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