3 Retail Apparel Stocks in the Bargain Bin

TK All-Star posted on 11/04/10 at 03:02 PM

Alan Brochstein identifies 3 stocks that had a tough 2010 but are poised to do better next year

Years of watching the fortunes of retailers ebb and flow have taught me that the best way to succeed in picking among the stocks is not to chase winners, but rather to pick them up when they have disappointed. In other words, I like to shop from the bargain bin. 

It’s not as easy as just buying what’s down, because you don’t want to end up with a company that has lost its edge. Consumer Stocks have been generally strong this year, with the sector return of the S&P 500 sector at 19.82% (through 11/03) blowing away the overall market, as the S&P 500 is up 7.43%. In fact, arguably it’s the best-performing sector of 2010.

With the goal of finding some special “mark-downs”, I ran the following screen:

•    Russell 3000
•    Retail/Apparel Industry
•    Market Cap > $500mm
•    YTD Price return < -10% 
•    Net Debt to Capital < 10%

Here are the 3 names that made the cut:

If you are interested in even smaller companies, there are several other companies worth investigating that didn’t meet the $500mm minimum.

Of the three names that did meet all of the criteria, I would note that I added Chico’s (CHS) to both of my model portfolios near the lows this summer but find it still very attractive. I just added Skecher’s (SKX) to my watchlist and am contemplating adding it to my Top 20 model. I am less familiar with J. Crew (JCG), but find it very interesting. 

Note that all of these companies have market or below-market P/E ratios and are growing and expected to grow (though SKX EPS are projected to decline after a stellar 2010).  

CHS has a new CEO with a great history of success. He led Land’s End, which was sold to Sears (SHLD) and then ran Tommy Hilfiger, which was sold to private equity. While there have been some rumors about potential sale of the company, I don’t think that has to happen to make it a good stock. I believe that they will expand their margins and get a similar valuation of 14-15 P/E. Note that the company has a lot of cash and recently started paying a dividend. The cash balance will most likely be declining due to share repurchases, but, at the end of Q2, it stood at almost $500mm (nearly 30% of the market value).

SKX was just beat up after a strong quarter that showed an unsustainable rise in inventory. In fact the inventory may be $100mm too high for now, though they will most likely work it off over the next few quarters. The company has been riding the trend in “toning” shoes as a market leader. While they may have made a timing mistake, that trend appears to be sustainable. Beyond that, their cheaper shoes in general should continue to do well in a tough economy. It makes little sense to me that the market would knock $200mm off the market cap for an event that was widely anticipated. There is a very high short-interest. The company has a fortress of cash and very high insider ownership – two more encouraging signs.

JCG had a fantastic run following endorsement by Michelle Obama when her husband was elected President. The numbers look good to me, though it doesn’t look as attractive on the surface as SKX or CHS (mainly because the margins are already pretty high). The company has $290mm of cash net of debt, or about 15% of the market value. Impressively, unlike most retailers, the company grew right through the recession, posting sales growth of 7% in 2008 and 10.5% in 2009 (note that the fiscal year is actually a month later than those calendar years). This year, they are projected to grow sales by about 10%. The decline this year appears to be simply a consolidation after a terrific 2009. 

Screening is a tool to identify stocks to study more closely for potential investment.  In this case, we have identified 3 stocks that have had a rough 2010 but look to be good companies for the long-haul, potentially rewarding investors if they can get back on track (in the case of SKX) or stay on track (for CHS and JCG).

Alan Brochstein

Disclosure:  Long CHS in Conservative Growth/Balanced Model Portfolio and Top 20 Model Portfolio (Invest By Model).

Any strategies discussed and examples using actual securities and price data are for educational and illustrative purposes only and do not imply a recommendation or solicitation to buy or sell a particular security or to engage in any particular investment strategy. In reading content in the Trader Network, you may gain ideas about when, where, and how to invest your money. Although you may discover new ideas or rationale that may be compelling, you must ultimately decide whether or not to put your own money at risk. Consider the following when making an investment decision: your financial and tax situation, your risk profile, and transaction costs.

Supporting documentation for any claims made in this post will be supplied upon request by the author of the post, Alan Brochstein / AB Analytical Services, who is solely responsible for the views expressed here. Send a private message to All-Stars using the link below the profile image.

Alan Brochstein / AB Analytical Services, maintains a cross-marketing relationship with TradeKing.

Posted by TK All-Star on 11/04/10 at 03:02 PM


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