Sizing Up Specialty Retail

If you’re looking to play specialty retail, J. Crew’s exactly the kind of company you want. Of course, CEO Mickey Drexler is taking his company private, removing JCG from your stock shopping list. But the popular store still offers a mold for other retailers to succeed as it has.

This is no easy space to trade. Unlike the department stores or apparel names that Cramer has highlighted this week as part of his series on the top retail stocks, specialty companies tend to rise and fall on all kinds of short-term data. Did they get the season’s fashions right? Is the product line strong? Were same-store sales better than expected? If the answer to any of these questions is no, then it’s very likely that the stocks will take a hit.

That dip in share price, as is so often the case, can present an opportunity, though. As long as the fundamentals hold up for the long term. Investors just have to make sure the companies in question satisfy two essential criteria: 1. they’re opening new stores both here in the States and overseas, i.e., there’s the potential for growth; and 2. they’re good at launching new concepts and turn into entirely new stores, just as J. Crew did with Crew Cuts and Madewell.

Cramer also said that a good CEO like Drexler can’t be underestimated. The specialty game is all about management, and specifically management with a keen sense of fashion. Because that’s how they’ll grow their business.

So who fits the bill?

Glen Senk of Urban Outfitters. He grew that one concept into Free People, Anthropologie and the newer upscale brand Leifsdottir. Urban even has a new house-and-garden store Terrain. And there’s a wedding concept due before Valentine’s Day.

URBN is up about 1,000 percent in the past 11 years, but Cramer thinks there’s growth still to come. Just compare the company’s 355 stores worldwide with Abercrombie & Fitch, American Eagle and Aeropostale, each of which have about 1,000 locations.

“Urban thinks it can ultimately, unbelievably, double [its] North American store count with its existing brands. So just imagine how big this could be if they successfully create more new ones,” Cramer said. “That’s why the company’s accelerating new-store growth in the 2012 fiscal year. They’re opening 50 to 55 new locations.”

Cramer thinks URBN, trading at just 19.4 times earning with a 20-percent long-term growth rate, is cheap. But given how volatile the trading can be in these specialty retailers, investors might wait for a pullback to offer them a better price.

In addition to Urban Outfitters, Cramer said he likes Limited as well. You know limited as Victoria’s Secret, Bath & Body Works and La Senza, among others, and the company is finally starting to turn after a dearth of new concepts dragged on the stock. But 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 years earnings despite a 17.5-percent long-term growth rate.

“In other words,” Cramer said, the “price is still right.”

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