Inside Wall Street
WOOLWORTH'S NEW LOOK IS WORTH LOOKING INTO
Despite the market's surge since mid-January, it's not too late to jump in, say some smart-money investors. True, many of the 30 stocks that make up the Dow Jones industrial average have flown practically out of sight, but these pros think at least one is still underpriced: Woolworth.
Once the "old reliable" of the general-merchandise business, Woolworth is now operating as if it were retailing's new kid on the block. The hitherto stodgy chain has restructured its variety-store format and is now a big multinational operator of specialty stores, selling mainly shoes and apparel.
"There's been a lot of interest in retailers of late, but Woolworth has just begun to catch fire," says Arnold Schmeidler, president of a New York investment firm that manages some $300 million. Prior to the market's war rally, Woolworth was out of favor, in part because of disappointing U. S. sales that were hurt by the slump in consumer spending. But now, the chain is seen as an ideal end-of-the-recession play. Schmeidler thinks the stock is still trading at a "big discount to the market." And in an industry where debt has hurt many retailers, Woolworth's balance sheet is in strong shape, he notes.
Partly reflecting the market's advance, the stock has gone from 27 in mid-January to 35 on Feb. 19. Now trading at 11 1/2 times Schmeidler's 1992 earnings estimate of $3 a share, it deserves a price-earnings ratio at least equal to the market's 15, he believes. That makes Woolworth a $45 stock. An analyst at Standard & Poor's figures the big retailer will earn $3.25 a share vs. an estimated $2.80 in the year that ended Jan. 31, 1991. Based on that estimate and a p-e of 15, Woolworth is worth $48 a share.
MORE STORES. Tom Tashjian, a veteran retailing analyst at Seidler Amdec Securities in Los Angeles, thinks a 15-to-16 p-e is achievable over the next two years. That's in line with the company's estimated earnings-growth rate of 16% over each of the next three years, he says, and should support a stock-price gain of at least 40% this year. The acceleration in earnings growth will be spurred by the rapid expansion of Woolworth's already-large network of specialty outlets in the U. S. and abroad, says Tashjian.
With its more than 8,000 refurbished stores, Woolworth will be a chief beneficiary of the anticipated economic recovery, says Tashjian. In addition to the U. S., Woolworth operates stores in 14 countries, including Australia, Canada, and Germany. More than 6,500 of the stores are specialty outlets, such as the profitable Foot Locker shops owned by its Kinney Shoe unit. Woolworth is expected to open some 700 to 800 more specialty stores by yearend. Tashjian thinks shoes will help move the chain forward during the recovery.GENE G. MARCIAL