Is This a Good Time for Retail Stocks?

In mid-September, government data showed that higher energy costs contributed to higher consumer prices in August, crippling already cash-strapped shoppers. Despite the fact that the recession apparently ended in late 2009, slow growth in the job market has tamed the excitement of average investors, making it hard to predict a big boom in retail stocks.

However, it's interesting to note that the SPDR S&P Retail ETF is up about 18% so far in 2010, far outpacing the minor gains in the general market. And this is notwithstanding high unemployment, rising prices for raw materials, and a sluggish pickup in income growth.

Typically, this time of the year is a great time for retail stocks. Back-to-school sales send flocks of children and their parents to malls and outlets, and before we know it, the holiday shopping season is in full effect. This is the time to shine as retailers have to manage gobs of inventory, tout new and improved items, while maintaining and attempting to improve their brand image. The fall and winter season has the ability to separate the good from the bad, and often times, the very bad.

Augusts retail comp and same-store sales numbers were pretty mixed throughout the industry, although as a whole they came in above analyst estimates. I have a feeling that although consumer sentiment is generally pretty pessimistic, retailers will still manage to surge this season.

In order to find some of the best deals out there, I ran a screen to help single out the best deals available. The companies below all have been able to average revenue and earnings growth over the past five years (no easy feat); in addition, I've included their P/E ratios to illustrate where the best value may be. Below are the results:

Company

5-Year Revenue Growth

5-Year Earnings Growth

P/E Ratio

Amazon.com (Nasdaq: AMZN  )

30.2%

29.8%

64.9

Dress Barn (Nasdaq: DBRN  )

18.9%

32.0%

13.7

Urban Outfitters (Nasdaq: URBN  )

17.4%

17.2%

22.4

Aeropostale (NYSE: ARO  )

17.3%

25.2%

8.9

Buckle (NYSE: BKE  )

13.2%

21.7%

9.7

Cabela's (NYSE: CAB  )

9.7%

7.0%

19.9

Target (NYSE: TGT  )

6.1%

3.9%

14.8

Sources: Capital IQ, a division of Standard & Poor's; Yahoo! Finance.

However, only a few of these companies have been able to overly impress this year, during the toughest of times. Urban Outfitters and Cabela's both beat analyst estimates last quarter, but Buckle and Dress Barn fell below expectations, while Aeropostale and Target delivered exactly the results investors were anticipating.

It's definitely not an easy environment, especially with Internet retailers like Amazon grabbing such an increasingly large piece of the pie. The CEO of Urban Outfitters confirmed this sentiment recently, when he said "We do not benchmark ourselves against legacy brick-and-mortar retailers. We are benchmarking against e-tailers."

This certainly isn't a list of stocks to buy; more so it's a great place to start some of your retail research. My foolish colleague Alyce Lomax recently penned an article telling you which retail stocks are hot and which are not, so be sure to check it out.

Jordan DiPietro owns no shares of any company mentioned. Amazon.com is a Motley Fool Stock Advisor choice. The Fool owns shares of Aeropostale. Try any of our Foolish newsletter services free for 30 days. True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community. The Motley Fool has a disclosure policy.


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 30, 2010, at 2:10 AM, Glycomix wrote:

    Aeropostale is the best value= performance/price.

    It gets the bronze medal for net-income growth with a 25% increase in income, and its gets the gold medal for value having the lowest price/earnings ratio. It's PE is 8.9.

    I predict that Aeropostale's stock price will rapidly increase thought the Christmas holidays. That's the busiest buying season.

  • Report this Comment On September 30, 2010, at 5:15 AM, exdividendday wrote:

    Consumer retailer could suffer a little if an economic downturn (doubledip) comes. If i would invest in the retail sector, i would prefer stocks from the drug retail market. I researched five stocks that could give investors long-term returns. Here are my results:

    http://long-term-investments.blogspot.com/2010/09/five-drug-...

    The average price earnings ratio is 13.34 and the dividend yield amounts to 2.60 percent.

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