If you are searching for the pincer of the recent stock market correction, look no further than clothing retailers. Bears have crushed stocks in the group, throwing out the baby with the bathwater. It is a veritable blood in the streets moment. You should take the opportunity for selective buying.
Recent gains this week have not changed the story. Investors are positioning for a double-dip recession against policy makers, both fiscal and monetary, with no bullets to fight the battle. In the clothing sector we are witnessing a perfect storm of negative factors conspiring against these businesses. If consumer spending contracts as it likely would in an economic slowdown, retail companies will see lower revenue and profits.
Watching the group over the last few weeks has been interesting and enlightening. I have yet to see a retail stock avoid the carnage. Even companies with stellar performance are not escaping the downdraft. The across-the-board action creates opportunities.
While it is true that a weaker consumer would create operating challenges, there are businesses that are positioned to do well irrespective of economic growth. The discounted values of these solid names should be viewed as a chance to buy quality at a low price.
Here are five pummeled apparel stocks:
You know the market is in a sour mood when a company reports earnings results that beat estimates and includes strong guidance only to see shares lose value in the immediate trading after the news is released. Such was the case last week with Express.
On Wednesday after the market closed the trendy teen retailer reported profits for the quarter ending July 31 that beat Wall Street consensus estimates by 2 cents per share. The market reaction to the news that also included raised guidance for the year was to sell the stock aggressively after shares opened higher. By market close on Thursday, shares of Express were actually down by 4 percent from the prior day close.
Since then the stock has rallied, but at its current price of $18.50, the stock is a bargain. The recently reported quarter marked the third straight period of beating Wall Street estimates. For the full year ending Jan. 31, 2012, Wall Street expects the company to make $1.61 per share. In the following year, profit estimates grow by 16 percent to $1.86 per share. At current prices investors can buy this fashion pick for just 11.5 times current year estimated earnings.
High-end retail has been doing well during this fragile recovery. The rich continue to spend at a strong clip. They will likely do so rain or shine. Upscale fashion retailer, Guess should be a beneficiary of that trend.
Shares of Guess caught fire early last week as investors figured out that the company was being punished unjustly considering operating performance, expectations and current valuation. On Monday and Tuesday, Guess was up approximately 10 percent. The gains in advance of earnings took some of the steam out of an earnings report that was relatively positive.
On Wednesday after the market closed, Guess reported adjusted earnings results that beat Wall Street average estimates by 3 cents per share. Unfortunately for bulls, guidance for the future was a bit soft. That was all the excuse the market needed to push shares of Guess lower on Thursday. The stock lost most of its gains from earlier in the week, closing down nearly 7 percent for the day.
At the mid-point of the reduced guidance, shares of Guess? trade for 10 times current year projected earnings. Considering the company is likely to grow profits at a 15 percent clip, the stock is cheap. I would buy this stock at these prices.
3. Collective Brands
One stock to buck the trend of broad-based selling is Collective Brands. The small-cap shoe retailer, which owns names like Payless Shoes and Stride Rite, impressed with its latest earnings report last week. Shares soared 20 percent on the news, and they continue to move higher this week.
Despite the gains, shares of Collective Brands are well below highs reached only a few months ago. The stock traded for $22 per share in late April. The drop in share value was directly related to a very poor first quarter when slower spending and traffic in stores resulted in profits that were much lower than expected.
Thankfully the company stopped the bleeding and managed to beat estimates by 2 cents per share for the quarter ending July 31. What apparently impressed investors was word that the company would be undergoing a review of strategic alternatives. Some interpreted the statement to mean the company would be sold to a private equity buyer.
Considering shares trade for just 15 times earnings that are expected to double from this year to the next, any buyer would be getting a fantastic deal. They would also likely pay a price much higher than current levels. Sale or not, Collective Brands should be bought at these prices.
One of the best performing stocks in 2010 was Zumiez. The hot teen retailer that catered to the X-Game set soared during the year, more than doubling in value. In 2011, the company has fallen back to earth as earnings growth momentum slowed. Throw in the speculation of a double-dip recession and what was a $33 stock is now trading for less than $20 per share.
From an operating performance perspective, the numbers are not showing any signs of deterioration in the business or future prospects for Zumiez. The company has beaten estimates in each of the last four quarters. The company reports results for the period ending July 31 after the market closed Wednesday. Given the popularity of the brand I expect the company to beat the average Wall Street estimate of 5 cents per share.
For the full year, Wall Street expects Zumiez to make $1.12 per share growing 17 percent to $1.31 per share in the following year. At current prices investors can buy the stock for 17 times current year estimates. That is a bargain considering the growth potential of the company. I would buy the stock at these prices.
5. Jos. A. Bank
Shares of Jos. A. Bank rose more than 8 percent Wednesday thanks to a strong earnings report. The company posted earnings that beat average Wall Street estimates by 6 cents per share. Revenue in the quarter also exceeded estimates. Prior to the report shares of the company were down approximately $10 per share. With the strong report the stock is now back above $50 per share.
The company has been a consistent grower of profits, increasing earnings on a year-over-year basis in 29 of the last 30 quarters. That said, the company has had mixed performance against analyst estimates. Over the last four quarters, Jos. A. Bank missed estimates in two periods and beat estimates in two periods.
For the full year, Wall Street is looking for profits of $3.47 per share. That number grows by 10 percent to $3.84 per share next year. Factoring in Wednesday’s gains, the stock trades for 14.5 times current year estimates. It is still a buy given the company’s demonstrated ability to grow profits.
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