ATGSY - Retail Stocks To Consider As Inventory Prices Are Being Slashed

• Out-of-home is back in fashion with reopening, and retailers that have pivoted to selling at-home products are seeing inventory write-downs.
• Time to avoid retailers that sell home improvement or small household items and focus on products that have been depressed by COVID-19.
• Dufry is the best reopening retailer pick, although CVS has limited exposure and a resilient model that could be considered as well.
• While not a retail company, Danone is also well positioned.

We are beginning to see what a post-pandemic environment will look like. While there will be more COVID-19 with more resurgences, people have gotten tired of thinking about it and the economy's weak footing makes excessive crackdowns on COVID-19 more untenable. With people especially taking advantage of a revenge travel season after years of limited mobility, out-of-home is back in force and retailers that carried a lot of in-home oriented inventories are writing down those portions by slashing prices and putting it on sale. We focus on out-of-home languishers that could see some impulse with the shift in spending, and provide some resilience to the write down trend, as well as resilience to macroeconomic troubles.

Thinking About Reopening

Reopening has been a theme in our own portfolio as well, where even if at a little premium from some alternatives, companies that have languished due to a depression in mobility definitely appear relatively attractive on the basis of that earnings catalyst. Along these lines we propose two ideas.

Dufry ( DUFRY )

Dufry which operates substantially duty free shopping at concessions within airports is very well positioned both in terms of its inventory and in terms of its channel with regards to reopening. Its inventory will not be slashed in price, carrying some of the better types of inventory like cosmetics, beverages and confectionery that have not received any particular impulse from lockdowns. Moreover, the channel makes Dufry defensible now as mobility recovers, where a more captive market and ultimately structurally better prices means a defensible margin now benefiting from greater traffic at airports and throughput in their business model.

Moreover, Dufry is merging with Autogrill ( ATGSF ) which used to be a Benetton property and also benefits majorly from restored mobility and tourism, where their highway concessions are well positioned to pick up higher rates of traffic this summer to sell their products.

Overall, a retail model that covers markets highly levered to reopening makes Dufry an attractive stock, with its carried inventories especially resistant to a reversal in in-home consumption. Naturally, it does come with the risk that meaningful crackdowns on COVID-19 resurgence will reverse again this positive direction.

Danone ( DANOY )

While not expressly a retail stock, Danone also benefits from reopening. Its core markets of Dairy, recently getting boosts from plant-based products that appeal to vegan markets, as well as specialty nutrition, haven't gotten a particular impulse from greater in-home production. While some of those segment saw a little bit of added growth, there wasn't a narrative change in those businesses. However, for the water segment which accounts for almost 20% of EBIT in 2019, the decimation of the out-of-home channel has been a problem for the company during the pandemic owing to its ownership of the Evian brand, a premium water that was an important margin contributor depending meaningfully on out-of-home . As reopening takes effect the water segment acts as the growth driver for the quarter and also the driver of better pricing and mix. With resilient markets elsewhere, the current dynamic justifies pricing restored to a pre-COVID level. This is a resilient pick thanks to specialised nutrition and key dairy brands with decent income at a 3.5% dividend yield. The main risk here is that its more premium diary brands like Activia and others might be vulnerable to downtrading as the recession comes in, but still the extent of sales loss should be pretty limited.

Thinking About Resilience

CVS ( CVS )

While not exclusively a retail idea, to avoid entirely the issue of write-downs one might consider CVS, a pharmacy retailer that benefits both from inventory that didn't really depend on the in-home impulse over the last couple of years as well as other highly cash generative businesses and an attractive longer-term thesis. Supplements and pharmacies are not at risk in terms of volume or pricing. Moreover, the Aetna contribution cannot be overstated, especially as yield rise and the return on reserve portfolios improve for insurance companies. With a cash generative base within insurance, benefiting from positive insurance pricing trends over the last year and a half, we think that CVS' comprehensive picture remains resilient, and its 16x PE valuation looks fair for a company that constitutes a flight-to-safety destination. With longer-term e-pharmacy ambitions that we believe it can achieve even against other logistics contenders like Amazon ( AMZN ), CVS is always a reasonable place to park money , also for the 2.4% dividend yield.

Conclusions

Reopening is the main factor and correlate for understanding which retailers' inventories are best positioned for maintaining pricing and company margins. Everything comes in cycles, and the current reopening is likely to be relatively durable, with COVID-19 being the worst period companies like Dufry will ever see. While concerns around the recession and its extent affect all stocks, as far as retail positioning goes, these have catalysts that should support both volume and margins over the next 6 months, and probably forevermore relative to the negative impact delivered by the COVID-19 lockdowns.

-Why have retail stores been slashing inventory prices? How will this impact retail stocks?-What are your favorite retail stock picks? Why? What should investors know?-What is your analysis of each of these picks? What should investors consider about your picks?-What risks and opportunities exist for each of your picks?-Who are the main competitors for your picks that investors should be aware of?-Have there been any recent news stories or events surrounding your stock picks that investors should be aware of?-What are the main takeaways that investors should know after reading your analysis?

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