6 Risky Retailers

You don't need to watch a Victoria's Secret lingerie show or thumb through an Abercrombie & Fitch catalog to know that retail can be sexy.

There are plenty of risque -- and risky -- retailers out there. You just need to look beyond the discount department stores that arm your aunt with ill-advised stretch pants. Investors with a tolerance for risk in the pursuit of heady returns can score some serious gains with the right chains.

Let's go over six risky retailers that may belong in your shopping bag -- and my outlook for the year ahead.

1. Build-A-Bear Workshop (NYSE: BBW  )
Who says that teddy bears are cuddly? The stuffed-animal-creation concept has been posting negative comps since 2006, as shoppers outgrew the novelty of paying a premium for custom-tailored bears that are stuffed to order.

If the concept appears left for dead, why did the shares pop 33% in a single day earlier this month? Well, the move happened after reports indicated that Build-A-Bear was shopping itself to private-equity firms.

Outlook for 2011: Not good. Comps did begin to turn the corner lately, and analysts see a return to profitability this year. Color me skeptical. Unless a buyer does emerge that's willing to buy Build-A-Bear for a premium, the shop could face a rough 2011.

2. Crocs (Nasdaq: CROX  )
The maker of fashionably dubious yet oh-so-comfortable odor-resistant resin shoes has experienced peaks and valleys over the years. It's climbing back these days, posting a 35% spike in retail sales during its most recent quarter. Adjusted earnings climbed even higher.

Crocs is also expanding again, entering Puerto Rico earlier this year. With 250 styles of shoes these days, I can assure you that you won't find all of them ugly.

Outlook for 2011: Surprisingly good. Crocs has a cash-rich, debt-free balance sheet, so there are no near-term liquidity concerns. Analysts see Crocs earning $0.74 a share this year and $0.94 a share come 2011. This isn't the same Crocs that the market rightfully turned its back on a couple of years ago. It's been honing its craft in the shadows.

3. China Xiniya Fashion (NYSE: XNY  )
Selling men's formal and business-casual apparel in China seems like a no-brainer on the surface. As the most populous nation's economy continues to improve, so will the working class of conventional occupations that require presentable clothing.

Xiniya goes one step further, concentrating on second-tier and lower-tier cities that are just coming into their own economically. It sells its Xiniya-branded apparel through 1,300 third-party retail outlets.

Outlook for 2011: Pretty darn good. Xiniya isn't a hot IPO that may crash and burn. It went public at $11 last month and actually fell into the single digits this month. The growth is there. The story is there. Investors just need to put the two together.

4. lululemon athletica (Nasdaq: LULU  )
Selling yoga clothing and other high-end fitness apparel to women in ritzy shopping malls is paying off for lululemon. The Canadian retailer delivered another blowout quarter earlier this month, as fiscal third-quarter net revenue soared 56% on the strength of healthy expansion and an amazing 29% spurt in comps on a constant-dollar basis.

Things got better on the way down to the bottom line, as margins expanded to deliver 84% in earnings growth -- even though the company had to pay a higher corporate tax rate.

Outlook for 2011: lululemon has been blowing past Wall Street profit targets with ease since the recession officially lifted last year. There's no reason for that trend to end anytime soon. Its valuation is stiff, with shares trading at a lofty 43 times year-ahead earnings, but it's hard to bet against this kind of runaway train.

5. Joe's Jeans (Nasdaq: JOEZ  )
A quick trek to Joe's Jeans' blog finds celebrity after celebrity caught out in the wild donning the company's apparel. Selling premium denim has opened the door for broader garb lines; non-denim sales have grown from 3% to 16% of the revenue mix on the wholesale side over the past year.

Alas, Joe's push into physical retail with namesake stores hasn't come cheap. It's also getting slammed with leaner margins on the wholesale side, which still accounts for 84% of the revenue here.

Outlook for 2011: Feast or famine. Joe's Jeans' low share price has made it popular with speculators this year, and that will continue. The improving economy should help justify spending more than $100 on a pair of jeans for fashion-forward shoppers -- something that will also clearly benefit rival True Religion (Nasdaq: TRLG  ) -- but why is most of Joe's Jeans expansion outside of California taking place in the form of outlet malls? Even if there's enough dated wholesale inventory to go around, won't this tarnish the premium brand over time?

6. GameStop (NYSE: GME  )
It's hard to argue with GameStop's model. It opens small boxes in strip malls, then maximizes its limited floor space by selling a ton of big-ticket video game consoles, games, and accessories.

It also only helps that it's carving out a cozy living by buying back used games from customers who want something new, only to sell those same games to thriftier gamers at healthy markups.

Outlook for 2011: Decent. GameStop boosted its profit guidance for the holiday quarter during its latest quarter last month -- and that was before it was reported that video game sales bounced back nicely in November. There are long-term concerns, especially as digital distribution threatens to make physical software sales obsolete, but the stock's dirt-cheap valuation at this point limits the risk until we see the fundamentals begin to crack.

Which of these risky retailers do you think will be the biggest winner in 2011? Share your faves in the comment box below.

Motley Fool Options has recommended writing covered calls on GameStop. The Fool owns shares of GameStop. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Longtime Fool contributor Rick Munarriz doesn't mind making risky shopping decisions, but at least he gets a receipt there in case he needs to make a return. Wall Street isn't as forgiving. He does not own shares in any of the stocks in this story. He is part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.


Read/Post Comments (2) | Recommend This Article (10)

Comments from our Foolish Readers

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 December 21, 2010, at 6:02 PM, Pat4Ra wrote:

    Thanks Rick. But it looks like you missed the elephant in the room! BBY. Do you think it will bounce back in 2011? Especially if web sellers are made to collect sale tax due to changes in lagislation? Aweful lot of state govts and local govts are under and love to increase revenue. Best Buy was a recommendation of MF some times ago.

    Pat

  • Report this Comment On January 05, 2011, at 9:52 AM, gerarddeis wrote:

    Joe's seems to be having some severe problems.Their expansion into lower margin retail storefronts... i.e.outlets, is making their margins much leaner and hurting their brand. For every suffering full price retail store they have four outlets selling jeans about 25% below wholesale with overhead and store investment costs to boot. So this begs the question as to what their retail vp is thinking..let alone their CEO. It seems the decisions are coming from individuals with a lack of success selling (at MSRP) their premium price designer clothing within their only four full price stores. If 84% of their revenue is from their wholesale division then what is their head of retail or execs thinking?

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