Why These Specialty Retailers Are Attractive

The continued struggles facing the U.S. consumer have been well-documented. Millions of Americans are still keeping a tight lid on spending, even four years after the official end of the Great Recession. That's because, despite the improvement in the economy, progress remains extremely slow due to a variety of factors, including higher taxes and the slow-to-recover labor market.

At the same time, certain specialty retailers are excelling, even in this difficult climate. As a result, opportunities do still exist in retail, provided you focus on the biggest winners.

Ringing the registers
Home Depot (NYSE: HD  ) almost needs no introduction. It's the world's largest home improvement retailer and holds a market capitalization in excess of $100 billion.

The domestic housing market has actually been one of the best-performing areas of the U.S. economy in recent months, and Home Depot has taken full advantage. Reuters reported that existing home sales in the United States surged in July to their highest level since November 2009, and Home Depot has profited handsomely. In its second quarter, the company racked up impressive 10.7% growth in same-store sales, which measures only sales at locations open at least one year. Diluted earnings per share, meanwhile, soared 23% year over year.

Economists and analysts widely expect the housing momentum to continue, even in the face of higher interest rates, which should keep the good times rolling for Home Depot.

A smaller competitor, yet one that is still performing admirably amid a tough economic backdrop, is athletic apparel retailer Foot Locker (NYSE: FL  ) , a $5 stock by market capitalization that operates nearly 3,500 stores in 23 countries across the globe.

Foot Locker has realized 5% sales growth and 11% growth in EPS through the first half of its fiscal year, with year-to-date comparable store sales up 3.5%, and an even better 4.9% on a constant-currency basis.

Foot Locker has excelled, thanks to its focus on efficient expansion, and store renovations. The company is very selective about where it opens stores, and isn't afraid to close under-performing locations. In the second quarter, Foot Locker opened 24 new stores, remodeled or relocated 89 stores, and closed 44 stores. Clearly, this is a company focused on efficient growth, rather than wasteful empire building.

In addition, Foot Locker keeps its balance sheet sparkling clean. As of the end of its most recent quarter, Foot Locker's cash, equivalents, and short-term investments totaled $836 million, compared to just $141 million in debt on its books.

Not to be outdone, Fossil (NASDAQ: FOSL  ) is also in tremendous financial standing. The company is quite simply firing on all cylinders, showing strength in every one of its key markets. Its second quarter sales and EPS jumped 11% and 15%, respectively, each setting new records.

This is because Fossil is growing in all of its geographic markets. In the second quarter, net sales grew in all segments: North America (up 4%), Europe (up 16%), and Asia-Pacific (up 14%). Clearly, Fossil has been able to effectively shrug off the global economic malaise thanks to its strong brand.

Shareholder returns aplenty
Fortunately for investors, these companies aren't stingy about sharing their financial windfalls with their shareholders. Each of these stocks is handing out gobs of cash back to investors in the form of hefty share buyback programs, and some even provide solid dividend increases as well.

Home Depot is simply a giant in the realm of shareholder rewards. Not only does the company pay a competitive 2% dividend, but it buys back huge amounts of its own shares. Year to date, Home Depot has repurchased $4.3 billion of its own shares, and yet still intends to purchase an additional $2.2 billion of its own stock over the remainder of the year.

Foot Locker is no stranger to increasing shareholder rewards, either. Earlier this year, it increased its dividend 11%, and currently provides investors with a solid 2.5% yield. In addition, the company spent $100 million in the second quarter repurchasing 2.8 million of its own shares, representing about 2% of the company's shares outstanding.

Speaking of share buybacks, Fossil is extremely committed to returning cash to shareholders by retiring its own shares. The company spent $169 million on share repurchases in the second quarter, and still has $843 million left in its existing share repurchase authorization.

Opportunities for growth remain
Not only are these stocks each excelling in what continues to be a difficult economic environment, but since each is tied to the health of the consumer, their fortunes stand to improve even further.

As the global economy continues its gradual recovery from the worst financial crisis in decades, consumers are slowly loosening the grip on their purse strings. This means that, as good as they're performing now, there's plenty of room for improvement for these companies.

As a result, investors looking for opportunities in retail should look to Home Depot, Foot Locker, and Fossil.

The retail space is in the midst of the biggest paradigm shift since mail order took off at the turn of last century. Only those most forward-looking and capable companies will survive, and they'll handsomely reward those investors who understand the landscape. You can read about the 3 Companies Ready to Rule Retail in The Motley Fool's special report. Uncovering these top picks is free today; just click here to read more.


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