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After years of cutting back and pinching pennies, the consumer seems to be on the rebound. Sure, the employment situation is still tough, but the economy and market are getting better overall.
How do we know? Well, one sign came over the Thanksgiving holiday. According to The New York Times,212 million shoppers hit the stores that weekend, spending $365 each. That’s a jump of 6 percent over the previous year.
As far as Cramer’s concerned, that strength, that bullishness in the retail sector means that the earnings estimates for this group are “way, way too low,” he said during a recent “Mad Money.” And low estimates often lead to earnings beats, which in turn lead to higher share prices.
Given this possibility, and the fact that we’re in the middle of a typically feverish spending season, Cramer thought it was a perfect time to lay out his top retail picks. Whether department stores, specialty names or apparel makers, he thinks the following 11 names are the best.
Posted 9 Dec 2010
This retail bellwether has everything Cramer likes in a department store: strong quarterly results, lean inventories and smart merchandising.
Inventory levels are especially important heading into the holiday season because you can’t get financing to bring in new product until the old product has been sold. And if a store is caught with too much, it’s forced to cut prices, which also cuts into profits. But Macy’s doesn’t seem to have to worry about that.
The stock’s relatively cheap, too, making it a buy in Cramer’s book.
Get Cramer’s full report on Macy’s.
If you’ve watched “Mad Money” at all over the past six months, you’ll know how much Cramer likes this company. Deckers, maker of the iconic UGG shoes and Teva sandals, has been one of his high-growth favorites, as it’s part of a industrywide bull market. But now there’s a new catalyst.
Deckers is blowing out its UGG line to focus on men, and it’s enlisting New England Patriots quarterback Tom Brady to help them do it. No one on Wall Street saw this coming—Cramer checked; it’s not in the research—which means estimates will have to be raised. The result? A 10-percent boost to earnings, which translates into a 10-percent boost in the share price as well.
Click here for more on Deckers Outdoor.
One of the best ways to play retail without risking as much exposure to any potential hiccups in the US economy is through the vendors. They conduct more business overseas and carry fewer fixed costs. Plus, they’re never on the hook for merchandise that customers don’t want. That’s the sole concern of department stores.
In this space, Cramer likes Nike and Polo Ralph Lauren (more on the latter on the next slide). Nike, too, is a play on the shoe bull market, as it commands a 50-percent market share. Also, the company continues to expand internationally, with emerging-market sales up 24 percent in the most recent quarter. Brazil alone soared 70 percent.
Cramer also likes the fact that Nike recently boosted its dividend. As for the stock itself, NKE may trade at more than one times its growth rate—at or near that level is the “Mad Money” host’s definition of cheap—he thinks the eventual returns are well worth paying up for.
Here’s more from Cramer on Nike.
This stock is a lot like Nike, at least if you’re considering the metrics that Cramer values most when it comes to apparel makers. The overseas sales are growing, especially in Southeast Asia, and this is a premium brand name. Last quarter was terrific to boot. And though RL shares had climbed significantly coming into December, Cramer thinks this stock is worth paying up for as well.
Read more on Polo Ralph Lauren here.
Cramer called Warnaco is a very cheap derivative play on Phillips-Van Heusen. See, the former licenses the uber-popular Calvin Klein brand from the latter, making the clothes and running the retail outlets, while paying a fee for the privilege.
Right now Calvin Klein alone accounts for three-quarters of Warnaco’s revenues, and over the next four to six years management thinks the business could double in size. And that doesn’t even take into account the money Warnaco earns from licensing Polo Ralph Lauren’s Chaps and Speedo. Plus, the company owns its own brands, like Olga and Warner’s.
So how cheap is WRC? The stock trades at just about 13 times next year’s earnings despite its 16-percent growth rate.
“That makes it one of the cheapest apparel plays you've probably never heard of,” Cramer said.
Check out Cramer’s interview with Warnaco CEO Joseph Gromek.
The specialty retail space can be tough to trade because stocks in this group tend to rise and fall on short-term data like same-store sales. The keys to success then are twofold: Is a company opening new stores both here in the US and overseas? And is the company good at launching new concepts?
Urban Outfitters satisfies both those requirements hands down. CEO Glen Senk has grown that one store into four new concepts: Free People, Anthropologie, Leifsdottir and Terrain, which focuses on home-and-garden products.
There’s still plenty of growth left to be had. Just compare the company’s 355 stores worldwide with Abercrombie & Fitch, American Eagle and Aeropostale, each of which have about 1,000 locations. And we already know that urban plans to open another 50 to 55 locations in the 2012 fiscal year.
Like a lot of stocks on this list, URBN is cheap, too, trading at just about 19 times earnings with a 20-percent long-term growth rate. But again, this can be a volatile industry, so Cramer recommended waiting for a pullback before buying.
Get Cramer’s full report on Urban Outfitters here.
The other specialty name Cramer likes right now is Limited Brands, which you know as Victoria Secret, Bath & Body Works and La Senza, among others. After a dearth of new concepts dragged on the stock, Limited is finally starting to turn, and an aggressive international rollout is planned for 2012.
Also, Limited declared a $3 special dividend on top of its regular 1.7-percent yielder and authorized a $200 million stock buyback, two things you don’t do if you expect business to suffer. Even after a three-month run worth 43 percent for the share price, and with LTD near its 52-week high, the stock trades at just 15.8 times next year’s earnings despite a 17.5-percent long-term growth rate.
“In other words,” Cramer said, the “price is still right.”
Want more on Limited? Click here.
Is there a harder demo to capture than teenagers? Regardless, Abercrombie & Fitch does it well.
Cramer praised this company for offering the most growth in its cohort, which includes Aeropostale and American Eagle, its improving margins and its ability to incubate and launch new concepts. See: Hollister and Gilly Hicks.
Abercrombie also boasts low inventories, which as previously mentioned are all-important for the holiday season. Now the company won’t have to discount merchandise to empty its warehouse shelves, and that translates into more profits.
The stock may be near its 52-week high, but Cramer thinks the valuation is still reasonable. Of course, waiting for a dip in price before buying is always recommended. You never want to chase a stock.
Click here for more on Abercrombie & Fitch.
When CEO Manny Chirico appeared on “Mad Money” back in September, at the height of back-to-school shopping season, he scoffed at the media reports that predicted poor sales numbers for the retail sector. He said the season would be great, and it was.
Now we’re hearing similar sentiment for the holidays, though the media has started to lighten up a bit in its typically negative coverage. So what is Chirico saying now?
“Very strong,” is how he described business over these couple of months. “The US consumer is confident and is spending money in apparel.”
Cramer remains bullish on this stock, and he told viewers to buy PVH whether it pulls back or not.
Watch Cramer’s full interview with CEO Chirico.
The last group of retailers that Cramer highlighted was the mid-tier stores, a group he expects to see grow now that Washington has reached a compromise on unemployment benefits.
Here he likes Kohl’s, which has engineered a commendable turnaround and now possesses a balance sheet practically overflowing with cash. The company has done a great job at cutting costs, too, but the key metric is the growing store base: 1,100 locations in 49 states and counting, with 10 new outlets coming this spring and another 30 in the fall. And over the next few years, Kohl’s plans to get to 1,400 total stores.
Higher-margin private-label clothing and exclusive-to-Kohl’s products, such as Vera Wang’s Simply Vera, were a big part of the turn, and more of these products are on the way. Jennifer Lopez and Marc Anthony just signed on. This has brought higher sales and increased store traffic in the past, and Cramer doubts this time will be any different.
Kohl’s right now is trading at a discount to its peers when it usually trades at a premium. That’s hard to imagine given all the aforementioned positives, which means those positives just aren’t baked into the stock. Inventors then may want to buy KSS now.
Check out Cramer’s full report on Kohl’s here.
When this story published, Cramer’s charitable trust owned Kohl’s.
If you want to take still one step down the trade-down latter, you might look at TJX Cos., parent of TJ Maxx, Marshalls and Home Goods. Cramer likes its growing international business and its cheap stock. And while Q4 should bring some really tough compares, there is a good chance TJX will come through thanks to a rising momentum in sales, its store remodelings and rebranded image. (See: Fashionista commercials.)
What does Cramer has to say about Target and Walmart? Click here to find out.