Prudential Securities Inc analyst Wayne Hood has been advising investors to buy Kmart Corp shares for the past three years. Now he's changing his mind.
The company yesterday said it didn't lower inventory levels as expected, complained about the terms it gets from suppliers and held out the possibility of a third-quarter restructuring charge.
Hood was the only analyst among the six most bullish on the discount retailer to cut his rating, lowering his recommendation to "hold" from "buy." The change of heart at Prudential leaves Kmart with five "buy" ratings, 11 ``holds'' and three ``sells.'' Hood says the shares, which had more than doubled from a two-decade low set in December as Chairman Chuck Conaway got his turnaround plan under way, may have run out of gas.
"What will it take for us to come back to the stock? -- a reduction in inventory, a meaningful improvement in inventory turnover" and more favorable terms from vendors, Hood wrote in a note to clients titled, "Now It Gets Interesting." He couldn't be reached to comment further.
The concerns he outlined have dragged Kmart shares down 15 percent in the past two days, knocking the stock to No. 6 from No.2 on the list of this year's best performers in the Standard & Poor's 500 Index. Kmart's stock, which has gained 93 percent this year, fell US$0.73 on Friday to US$10.24. Hood's target price is US$11.
"What investors need to ask themselves is: Can they take it to the next level? Do they have the infrastructure and the management?" said fund manager Angela Auchey Kohler of Federated Investors Inc, which oversees US$161 billion and owns Kmart shares.
"What I think Wayne is saying is he's not sure."
Hood's rating reduction on the Troy, Michigan-based retailer was the first by any analyst since mid-December, when Marie Driscoll of Argus Research went to "sell" from "buy." Hood also lowered his forecast for next year's earnings by 20 percent, to US$0.60 a share from US$0.75. The average estimate of analysts polled by Thomson Financial/First Call is US$0.63.
Kmart is expected to return to profitability in this year's fourth quarter, after three quarters of losses that stem from investments in new distribution systems, employee training and store improvements.
"I kept a `buy' rating because I think right now that you can argue they can still get this thing going," Ladenburg Thalmann & Co analyst Eric Beder said. Like Hood, he doesn't own Kmart shares.
CEO Conaway, who came to Kmart from drugstore chain CVS Corp, has delivered on many of the promises he made to investors last year.
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