To teach you how to recognize the best retail names, Cramer is taking a walk through the mall this week to differentiate between the sector’s players. On Monday, he highlighted department stores, but on Tuesday shifted his focus to vendors and apparel makers.
If investors are worried about the pace of the economic recovery in the US, Cramer said the vendors are the smartest way to play retail. They have more international exposure than the department stores, specialty and teen retailers or discount stores do. Apparel makers are also leaner, as they have fewer fixed costs than actual retailers, such as having to pay rent on stores or buy the actual real estate. They also experience fewer costs because they need only worry about making the product.
An apparel maker, for example, makes a $100 retail value sweater for $25. It will sell the sweater to the department store for $50, which turns around and sells it to you for $100. The apparel maker is getting less for the sweater than it could by selling directly to the consumer, but unlike the department stores, it’s not on the hook for merchandise it planned to sell but couldn’t.
To identify the best apparel makers, Cramer always considers two criteria. First, he likes companies with the most international business. The US is too competitive courtesy of the consolidation among many department stores. Second, he looks for companies with a brand or fashion premium because they have more bargaining power with their distributors and can charge higher prices.
Here are Cramer’s fave apparel makers:
Nike : Cramer said this is one of the best ways to play the “raging worldwide bull market in footwear,” given its 50-percent market share. The company is growing its international exposure, where emerging-market sales were up 24 percent in its most recent quarter. Its Brazilian sales alone were up by 70 percent. Less than two weeks ago, Nike boosted its dividend, and the stock is up 17 percent since Cramer recommended it at $73.88 on March 22. NKE presently sells for 17 times next year’s earnings, but Cramer said he’s willing to pay up for it given its 10.5-percent long-term growth rate.
Ralph Lauren : Cramer thinks this company is best in breed. Its most recent quarter was terrific with an 11-percent increase in sales, which translated into a 30-percent increase in operating profit. The company’s southeast Asia business is growing, too. RL shares have climbed a lot lately, but at 18 times earnings with a 13.5-percent growth rate, Cramer is willing to pay up for this quality name.
Cramer would avoid, however, Liz Claiborne and Jones Group . LIZ has too much inventory, and JNY’s most recent quarter failed to impress.
“When you are dealing with apparel companies, I need you to stick with the absolute best,” Cramer said, like Nike and Ralph Lauren. “They have beloved brands, good execution and lots of international exposure. We want companies that can best control their own destinies, and that’s Nike and Ralph Lauren.”
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