The 7 Biggest Growth Stocks in Retail

Why are investors willing to pay only 10 times earnings for some stocks, but 20, 50, even 100 times earnings for others?

The short answer: growth. Companies that can grow their earnings meaningfully could make lofty current P/E ratios look cheap in hindsight.

Of course, any company can promise a rosy, growth-rich future. Figuring out which companies can actually deliver is far trickier. In this series, I take the first step by identifying companies that have put up the best growth track records in their respective sectors.

Below, I've listed the top seven sales growers in retail over the last five years. Here's how to interpret each data column.

  • Five-year sales growth: I rank each company's sales growth to capture its pure trailing expansion without regard to the vagaries of earnings.
  • Five-year EPS growth: Since sales growth means nothing if it doesn't ultimately fall to the bottom line, I've also included each company's five-year trailing EPS growth rate.
  • Five-year analyst estimates: This column shows us how much EPS growth analysts expect over the next five years. Just keep in mind that analysts tend to grossly overestimate a company's prospects.
  • Five-year ROIC range: Return on invested capital basically shows you how efficiently a company is converting its debt and equity into profits. We want companies that can do a lot with a little. By looking at the five-year range, we can start to gauge both the power and the consistency of a company's profit engine.

Company

5-Year Sales Growth

5-Year EPS Growth

5-Year Analyst Estimates

5-Year ROIC Range

Ascena Retail Group (Nasdaq: ASNA  )

18.1%

11.4%

13.9%

9.8% / 17.7%

Zumiez (Nasdaq: ZUMZ  )

16.6%

14.1%

21.9%

4.7% / 21.7%

Urban Outfitters (Nasdaq: URBN  )

15.4%

16.1%

19.2%

16.3% / 21%

Buckle (NYSE: BKE  )

14.7%

21.2%

10.3%

18.2% / 35.3%

Aeropostale (NYSE: ARO  )

13.2%

21.9%

9.2%

38% / 56.6%

Jos. A. Bank (Nasdaq: JOSB  )

12.8%

20.1%

14%

20.1% / 23.5%

DSW (NYSE: DSW  )

10.0%

26.5%

N/A

4.9% / 18.3%

Source: Capital IQ, a division of Standard & Poor's. N/A = not applicable; analyst estimates that are N/A result from lack of analyst coverage.

Use the table above as a first step to help you generate ideas for your own further research. Once you identify stocks worth a closer look, the following three steps will help you further assess their growth prospects:

  • Carefully study the table for possible danger signs, such as high sales growth but low EPS growth, analyst growth expectations significantly trailing past growth, and low ROIC figures. Then follow the trail.
  • Find out how the company achieved its prior growth: organically, or via acquisition? Can it sustain that previous growth?
  • Pay attention to how management plans to implement its growth plans. Does its strategy seem prudent and plausible to you?

Remember: The more profitable, efficient, and predictable growth a company can achieve, the more we investors should be willing to pay.

Learn more about any of the stocks that interest you by adding them to our My Watchlist tool. You'll get access to all the latest Motley Fool analysis, organized by company.

Anand Chokkavelu doesn't own shares of any company mentioned. The Motley Fool owns shares of Aeropostale. Motley Fool newsletter services have recommended buying shares of Zumiez. 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. 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 13, 2011, at 1:39 PM, prginww wrote:

    the short on URBN is stupid

  • Report this Comment On September 16, 2011, at 6:11 PM, rhuntjr wrote:

    I don't know who's more fickle and destructive--ARO customers or ARO investors. Sure, ARO has faced significant pressure on margins from rising commodity prices, but cotton prices are already down 53% since February and down 23% since ARO's latest earnings announcement. Furthermore, there is nothing fundamentally different about the company and its money-making spirit--the stock is just cheaper.

    In fact, the current stock price implies that cash flows will fall by a stunning 75% and stay there forever--in short, this stock is priced for death. I can understand that kind of valuation for a company that has a history of poor performance that's poised to go away--but ARO is nowhere near that type of company. ARO is one of just 8% of companies in the Russell 3000 that has created value for shareholders in each of the past 9 years.

    Expectations for ARO are so low that any improvement in the business can translate into a major gains in the stock.

    Expectations investing is powerful tool to understand the performance requirements embedded in stock prices. If you want more info on this concept, go here:

    http://blog.newconstructs.com/2010/05/19/how-to-make-money-p...

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