Do Higher Capital Expenditures Mean Higher Share Prices For Retailers?

Analysts at Citigroup recently took a look at hardline retail stocks and the new omni-channel initiatives that are driving capex in the space.

The analysts believe that these investments are likely to pay off for several names down the road.

Does Higher Capex Mean Higher Share Price?

Citi analysts observed capex as a percentage of total revenue. Rather than focus specifically on online or brick-and-mortar spending, analysts feel that it is important to look at a company's overall capex.

While the online channel is certainly a major part of the shift in hardline retail in recent years, analysts also see the importance of providing a better, more convenient shopping experience by opening more stores and/or renovating older ones.

Auto Parts

According to Citi's report, auto parts retailers are spending more in capex than any other hardline segment.

O'Reilly Automotive Inc (NASDAQ: ORLY) is the biggest spender of the group in terms of capex/sales, and leads peers Advance Auto Parts Inc (NYSE: AAP) and AutoZone Inc (NYSE: AZO) in terms of quarterly comps growth.

Home Improvement

Lowe's Companies Inc (NYSE: LOW) has typically outspent rival The Home Depot Inc (NYSE: HD), but Lowe's stock has underperformed Home Depot's in recent years.

Analysts believe that the fact that Home Depot executed its nationwide expansion prior to Lowe's gave it a lingering competitive advantage.

Analysts also note that Williams-Sonoma Inc (NYSE: WSM) has vastly outspent Bed Bath & Beyond Inc (NASDAQ: BBBY) in terms of online-related capex.

Top Pick

Analysts see big capex increases ahead for Lowe's, Advance Auto Parts and Best Buy Co Inc (NYSE: BBY).

They also note that it's no coincidence that these three names have often been unfavorably compared to close competitors Home Depot, O'Reilly and Amazon.com, Inc. (NASDAQ: AMZN).

Best Buy is Citi's top capex pick among the three names.

Disclosure: The author holds a short position in Amazon.com.