Checkpoint Systems (CKP): Is This Anti-Shoplifting Small Cap a Good Retail Bet? XRT & PMR

Small cap Checkpoint Systems, Inc (NYSE: CKP) fights shoplifting or retail theft and other forms of "shrink" that costs retailers over $112 billion worldwide last year (according to a study funded by the company), meaning it might be an interesting stock to take a closer look at and to compare its performance with that of SPDR S&P Retail ETF (NYSEARCA: XRT) and PowerShares Dynamic Retail ETF (NYSEARCA: PMR). Just how bad can shoplifting or shrink be for a retailer? Troubled retailer J.C. Penney Company, Inc (NYSE: JCP) has just reported that shoplifting took a full percentage point off the department store chain's profit margins during the quarter. Moreover and given that tens of millions of Americans are now facing higher health insurance costs thanks to Obamacare (which will likely impact consumer discretionary spending), retailers will need to find ways to shore up their margins and bottom lines by preventing retail theft with solutions from company's like Checkpoint Systems.

What is Checkpoint Systems, Inc?

Small cap Checkpoint Systems calls itself a global leader in merchandise availability solutions for the retail industry as it provides end-to-end solutions enabling retailers to achieve accurate real-time inventory, accelerate the replenishment cycle, prevent out-of-stocks and reduce theft, thus improving merchandise availability and the shopper's experience. Checkpoint Systems operates in every major geographic market and employs 4,700 people worldwide.

For performance benchmarking purposes, the SPDR S&P Retail ETF tracks the performance of the S&P Retail Select Industry Index with 99 holdings while the PowerShares Dynamic Retail ETF tracks the performance of the Dynamic Retail Intellidex Index with a more concentrated holding of 30 retail stocks. Its also more lightly traded with a trading volume of around 2,300 shares a day.

What You Need to Know and Be Warned About Checkpoint Systems, Inc

Earlier this month, shares of Checkpoint Systems plunged from the $17 level to the $13 level after reporting earnings that missed expectations. Specifically, Checkpoint Systems reported a 3.3% revenue increase to $174.5 million, gross profit margins of 40.3% verses 40.7% for the same period last year, operating income of $13.7 million verses $3.3 million and vet earnings from continuing operations of $0.18 per diluted share verses a net loss of $0.10 per diluted share. That may sound alright but in the earnings release, the CEO gave a more gloomy guidance:

"The fourth quarter will prove to be a much more difficult operating environment than previously expected due to Federal Government-related projects being delayed, U.S. retailers lowering same-store-sales expectations and lack of improvement in the European economy. As a result, we are reducing our full year guidance to reflect lower revenues, primarily in RFID asset tracking and RMS. We also now expect lower gross profit margins due to an unfavorable mix toward lower-margin hardware installations, delays in realizing all of the anticipated ALS cost savings and further pressure on the European RMS business."

In the earnings call (the transcript is available on Seeking Alpha here), the CEO also outlined a serious of internal missteps beyond lower same-store sales expectations, the sequester and Europe:

"Fourth, 4 incorrect management assumptions, 3 of which I'll characterize as impacting gross profit margins. Now the first one is that, clearly, we were overoptimistic on the timing to realize all of the Project LEAN cost of goods sold savings in the ALS business. Second, we underestimated the proportion of lower-margin new systems installations derived from recent market share gains, which will negatively impact EAS systems gross profit. Third, we incurred unexpected startup costs as we grow the RFID business, and these costs will negatively impact Merchandise Visibility gross profit. And fourth, we underestimated the continuation of foreign exchange translation and transaction losses."

In response, the CEO said they are implementing a series of actions that, over the next year, are intended to improve their forecast accuracy and to get back any predicted operating income shortfall to stay on track to meet 2015 goals with the majority of these actions being centered around process improvement and additional cost reductions.

In other words, Checkpoint Systems should, in theory, be doing great given the results of the 2012-2013 Global Retail Theft Barometer which they helped to fynd but it looks like management may have temporarily fumbled things in the wake of other economic headwinds. Otherwise, it should also be mentioned that according to Yahoo! Finance, Checkpoint Systems has a forward P/E of 16.56 – meaning its neither grossly over or undervalued for new investors.

Share Performance: Checkpoint Systems, Inc

On Wednesday, small cap Checkpoint Systems fell 1.88% to $14.08 (CKP has a 52 week trading range of $8.21 to $18.25 a share) for a market cap $583.41 million plus the stock is up 31.1% since the start of the year and up 26.8% over the past five years. Here is a look at the performance of Checkpoint Systems verses that of retail ETF benchmarks SPDR S&P Retail ETF and PowerShares Dynamic Retail ETF:

As you can see from the above chart, investors would have been better off since 2011 had they invested in one of the retail ETFs rather than Checkpoint Systems.

Finally, here is a look at the latest technical charts for all three investments:

The Bottom Line. Given the global problem with shoplifting, retail theft and other forms of "shrink" faced by retailers, investors might want to at least keep an eye on small cap Checkpoint Systems as it works on correcting "incorrect management assumptions" to get back on track.