NEW YORK — In the first full day of trading after Gene Kahn resigned from the helm at May Department Stores, shares of the retailer soared, closing Tuesday up 15.7 percent to $32.21 from the prior close.
The rally on shares of May helped boost the S&P Retail Index, which closed the market up 1 percent to 453.51. The announcement of Kahn leaving May as chief executive officer was on Friday after the market closed. On Monday, Wall Street was off due to Martin Luther King Jr. Day.
“We see a change at the top of May as a strong positive,” said Shari Schwartzman Eberts in a research note Tuesday morning. “While May was historically a leader in its industry, operating performance has severely lagged peers for several years, and recent same-store sales have been dismal; a change was needed, in our view.”
Schwartzman Eberts said in her note that she expected the stock to rally “as investors look to the potential earnings power from a renewed May.”
Rally it did.
After the announcement Friday, after-hours trading on the stock pushed it up 5.9 percent. On Tuesday, trading volume was heavy at 17.6 million, which was well above the three-month average trading volume of 2.5 million, according to Yahoo Finance. The stock’s 52-week high is $36.48, and the low stands at $23.04.
“While May’s ability to achieve its historical peak margins remains a question mark, especially given tough industry fundamentals, we expect investors will give them the benefit of the doubt in the near term, pushing the stock higher,” Schwartzman Eberts said.
The analyst upgraded the stock to “overweight.”
Deborah Weinswig, managing director of U.S. equity research at Citigroup Smith Barney, wrote in a Friday research report that Kahn’s resignation from May is “an opportunity for the company to bring in a visionary to open the next chapter of the May book.”
The analyst did not offer potential successors to Kahn.
Weinswig, who has a recently upgraded “buy” rating on May shares, believes that May’s board of directors recognized the prospect to drive comparable-store sales and improve the company’s merchandising direction under a new leader.“We are encouraged by the company’s focus on driving increased traffic into the stores, improving its assortments and attracting a younger customer, as these are issues that we have long awaited for the company to address,” said Weinswig.
May is one of Weinswig’s top stock picks for 2005 because of the potential that exists to enhance merchandising and leverage its Marshall Field’s acquisition.
The stock could outperform for four reasons, according to the analyst: in-store and merchandise enhancements; easy same-store sales comparisons in the next 12 months; a better chance for a sale of its credit receivables, and, with a target price of $35, or about 15 times Weinswig’s 2005 earnings estimate of $2.27 a share, an attractive valuation.
Schwartzman Eberts estimates May’s sales for 2005 at $15.9 billion. This includes a full year of sales from Marshall Field’s. The analyst applied a 13 percent operating margin, and calculates earnings to come in at $3.44 a share for this year.
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