How Will Off-Price Retail Fare As the Economy Rebounds?

This little known off-price retailer could be one of the best investments in the space.

Apr 14, 2014 at 1:16PM

Shoppers traded down to off-price retail during the financial crisis because it was cheaper. But even with a rebounding economy, shoppers are still going to stores. That's because shoppers have integrated off-price retail into their shopping routine. However, many investors might be missing this trend, and more importantly, overlooking an investment in the space.

The overlooked opportunity in off-price retail
Most investors think of either Ross Stores (NASDAQ:ROST) or The TJX Companies (NYSE:TJX) when thinking of off-price retail. However, one of the lesser-known names is Stein Mart (NASDAQ:SMRT) and it might present a compelling opportunity. Shoppers generally consider Stein Mart a bit more put together than either Ross or TJ Maxx.

Unlike the cement floors and jumbled racks that you'll find in some Ross and TJ Maxx stores, Stein Mart stores are nicer. However, Stein Mart keeps its products competitively priced, offering a blend of national brands and private label brands. The national brands give Stein Mart a fashion feel. 

Stein Mart is also a turnaround story. After going through four CEOs from 2003 to 2011, the company brought back Jay Stein to run the company. Since his return, he's been weaning the company off of coupons. Stein Mart is now focused on providing products that resonate with customers. 

Stein Mart's key growth opportunity
Stein Mart has less than 265 stores, down from 282 in 2008. After closing various underperforming stores, Stein Mart is looking to accelerate store growth. And the nice thing about that is that its new stores generate 20% more on an annual basis than an average store.

Stein Mart has already identified 100 markets for new stores (this includes some 20 in Southern California, 25 in Chicago, and 40 in the metro New York area). Even with another 100 stores, Stein will have just over 360 locations, compared to Ross Stores' 1,200, and TJ Maxx's 1,000 stores. 

Selling more product and internal efficiencies are core to Stine Mart's story  
Stein Mart has been offering more fashion-focused products. In 2009, about a third of its sales were national brands. That number was up to 70% in 2013. This attracts a customer that tends to spend more.

The other part of getting customers to spend more includes credit cards. Many retailers are finding success with private label credit cards. 2013 was the first full-year that Stein Mart offered its private label card, and credit card customers are already spending 50% more than other customers.

Stein Mart also continues to innovate on the supply chain side. A couple of years ago it revamped product delivery by utilizing warehouses to catalog and ticket merchandise, rather than shipping from distribution centers straight to stores.

As with any retailer, e-commerce is becoming increasingly important. Stein launched its e-commerce site last year, Ross is yet to make that move, and TJX already has a website. E-commerce still makes up less than 1% of Stein's sales, but should grow over time.  

How shares stackup
Stein Mart actually trades at a hefty discount to its major off-price department retail peers. Stein Mart trades at an enterprise value-to-earnings before interest taxes depreciation and amortization multiple of 7.7, while Ross trades at 9.8 and TJX at 10.7. Stein Mart also offers a 1.5% dividend yield, well above its peers.

With no debt, and over 10% of its market cap covered by cash, the balance sheet can easily support a robust store growth strategy. Investors should also look for Stein Mart to invest more heavily in e-commerce and eventually bring e-commerce fulfillment in house.

Bottom line
Stein Mart should benefit from a rebounding economy. Factoring in a continued strengthening of the housing market, and Stein Mart is worth a closer look. That's because shoppers are interested in sprucing up their homes and they're looking for more 'fashion' focused apparel than the other off-price retailers can offer.

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Marshall Hargrave has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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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