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The mall can be a pretty lonely place these days.
Even if there are signs that the economy has bottomed out, most chains are struggling to wrestle discretionary income out of potential shoppers. Many retailers have been forced into margin-slashing markdowns to clear store space.
As a contrarian investor, now is the time to pounce.
Some concepts will bounce back quickly; some chains are holding up better than you think. There are certainly plenty of established stores that are worthy of your investing dollar:
- Kohl's (NYSE: KSS ) has established itself as the top dog in attractively priced apparel that you won't be embarrassed to be seen in. Unfortunately, the market is all over this one, pushing its market cap up to nearly $17 billion, larger than Sears and Macy's combined.
- Wal-Mart Stores (NYSE: WMT ) is another no-brainer, but the discounter that Sam Walton built is already the world's largest retailer.
Let's aim lower -- a lot lower. I have spent the past few weeks taking a look at more obscure opportunities among China, Internet, and restaurant stocks. This week I'm going to delve into a few of the retailers that Mr. Market appears to be ignoring.
You won't find any billion-dollar babies here. I will stick to companies with a market cap of at least $100 million, because we also don't want to paddle too far into these uncharted waters.
Ready? Let's go.
lululemon athletica (Nasdaq: LULU )
This isn't a good time for the upper-crust chains like lululemon athletica, which pitches premium yoga pants and mats to well-to-do fitness enthusiasts. The recession has certainly derailed lululemon's initial buzz as a fast-growing concept.
However, lululemon is holding up better than you may think. Comps fell by a mere 2% in constant dollars during the retailer's latest quarter. Revenue rose 14% as the result of brisk expansion. Gross margins unfortunately contracted during the period -- leading to a fiscal second-quarter profit of $0.13 a share (after ringing up $0.16 a share a year earlier) -- but it was a lot better than the $0.10 a share that market was braced for.
I see lululemon athletica as one of the better bounceback plays in specialty apparel. Once consumers begin spending again, the pent-up demand for aspirational lifestyle winners will be significant.
Wall Street sees earnings soaring 30% next year after a flattish 2009. Debt-weary investors will also appreciate lululemon's sparkling, cash-rich balance sheet. Like its designer fitness duds, the stock isn't cheap, but it's worth it.
Conn's (Nasdaq: CONN )
Investors trying to piece together Best Buy's (NYSE: BBY ) quarterly report yesterday are doing themselves a grave injustice if they think the leading consumer electronics chain is the only beneficiary of Circuit City's liquidation. There will be several scavengers nibbling away at the Circuit City carcass, and Conn's is cheaper than Best Buy.
Conn's did spook the market last month, when it was bit by unusually large credit charge-offs. It's a recession. What can you say? However, even with its cautiously revised profit guidance, analysts see earnings growing 31% this year and 17% next year. Best Buy watchers are targeting slower growth of 0% this year and 9% come 2010.
Best Buy deserves a premium as the market leader, but if you think Best Buy is cheap at just 12 times next year's projected profitability, Conn's is an absolute steal at less than 7 times next year's net income target.
Zumiez (Nasdaq: ZUMZ )
You know that pessimism is overdone when you post a 12% decline in comps for the month of August, yet your stock soars 17% higher on the news. Then again, it's a relative relief when you consider that same-store sales fell a staggering 19% during its most recent quarter.
Zumiez is a familiar name with Motley Fool Hidden Gems subscribers. The retailer targeting fans of extreme sports was originally recommended three years ago.
Sentiment is clearly improving. Analysts now see the edgy mall chain earning $0.18 a share this year, twice the profit that they were expecting just a month ago. They also see income more than doubling to $0.39 a share next year.
Lumber Liquidators (NYSE: LL )
Let's ditch the mall for our final pick. Lumber Liquidators sells hardwood flooring. This is a highly fragmented industry, providing the perfect opening for a nimble chain to become the only nationally known specialist.
Sure, the home-improvement superstore chains sell planks and laminates, but have you tried on the orange apron of Home Depot for growth lately? It's not a good look. Lumber Liquidators is actually heading in the right direction, with analysts targeting earnings growth of 10% this year and 17% in 2010.
If Lumber Liquidators is holding up well now, just imagine how sweet it will look when the stabilizing housing market gradually turns the corner.
Knock on wood.
I'll be back next week with four "under the radar" stocks in a different industry. Which industry should I cover next? Let me know in the comment box below.