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A point of differentiation and where in the growth cycle the firm is are two areas of consideration before Howard Tubin makes that critical decision to issue a “buy” recommendation on a company’s stock.
This story first appeared in the November 16, 2011 issue of WWD. Subscribe Today.
Tubin, director in the equity research department of RBC Capital Markets who covers the softlines sector, told attendees that uniqueness, or a point of differentiation, gets his attention.
What Tubin wants to know is, “Do the product offerings stand out from the crowd?”
It’s the singular most important criterion. To be sure, quality of the management team is a consideration. And so too is the firm’s balance sheet. Also very high on that list, he said, is “where in the growth cycle” does the company under consideration fall? If it’s in that early stage, then you have a growth stock.
Among the names on Tubin’s list of standouts are Lululemon Athletica Inc., Limited Brands Inc., PVH Corp., The TJX Cos. Inc. and Ralph Lauren Corp. That’s because these firms are “meaningful to the crowd.”
Those representing firms whose uniqueness seem to have lost their edge include Gap Inc., The Talbots Inc. and Coldwater Creek Inc.
Tubin also said he doesn’t subscribe to the view that retailers in the lower-tier distribution channel are more risky. He pointed to Dollar General Corp. as an example.
“Dollar General is doing well because of the brands they offer, not the tier [of distribution] they’re in,” Tubin said.
In the question-and-answer session, Tubin noted how some companies are starting to look overseas for expansion, even if, like the Gap, they don’t have stellar performance in the U.S.
He also was lukewarm about J.C. Penney Co. Inc.’s planned every-day low-price strategy. While the move could help drive comparable-store sales, the analyst said it’s a strategy that would be “tough to wean customers off.”
When asked about some of the younger companies that offer a creative spark, Tubin cited Francesca’s Holding Corp., which went public earlier this year. Mentioning its small footprint of only 300 stores, Tubin said Francesca’s is unique and it doesn’t operate “cookie-cutter stores.”
As for last year’s takeover candidates, American Eagle Outfitters Inc. and Aéropostale Inc., teen retailer Aéropostale got the value component of the equation right, but missed on its merchandise mix. American Eagle has done a better job on its merchandise strategy. Both are essentially turnaround stories. Both are also takeover targets from a valuation point of view, but with little or no debt and cash on the balance sheets, Tubin concluded: “I don’t suspect either one would fold.”