Consumer confidence is waning. Retail sales are slowing as those stimulus checks dry up. A recession is looming before us. In this environment, you wouldn't want to bet your money on the consumer-goods sector, right?
Wrong! It's true that companies that rely on discretionary consumer income -- which seems to be in short supply these days -- may not have a rosy near-term future. Stock prices have dropped more quickly than a fad becomes a fashion faux pas, and many of those same stocks that were once flying off the racks are now sitting at bargain-basement levels simply because current spending levels are low. But the economy will recover, and when shoppers regain their spending power, these stocks won't be cheap for long.
Every week, we plan to look at some of the retail and consumer-goods industries' biggest stars. Whether they fit into your plans is your call, but here are some investing ideas based on current news and my long-term outlook.
When the going gets tough, the men go shopping
While spending on women's clothing continues to decline, men are spending more money on trendy threads, with higher-end products being the primary target. Now, that doesn't mean men are shopping more across the board -- just ask Macy's (NYSE: M), which reports a 2.1% drop in store-same sales for the second quarter and is projecting a full-year decline in comps.
But on the other hand, Ralph Lauren (NYSE: RL) is sporting first-quarter revenue growth of 4% and diluted earnings-per-share growth of 13%. Sure to gain an immediate bump from the buzz that the U.S. Olympic team parade outfits are sure to generate, Ralph Lauren delivered an overall same-store-sales jump of 3.9% and an online sales increase of 20% -- nothing to sneeze at, considering the spending fog that many retailers have found themselves mired in lately.
The company is predicting solid second-quarter and full-year revenue growth, and in last week's earnings release, it announced that it's raising its estimated EPS for the year. Ralph Lauren has a five-year revenue-growth rate of almost 15%, compared with an industry average of 2.35%. The stock price is about 15% off of its 52-week high, and at a price-to-earnings ratio of nearly 17 times this year's expected earnings, it's an noteworthy growth prospect in today's volatile retail market.
Cheap eats for college students
As the kids prepare to go back to school, colleges are getting ready for the largest freshman class in history. College students have always loved getting together to eat some wings, and one of the places they go to chow down, Buffalo Wild Wings (Nasdaq: BWLD), has long been a Fool favorite. The company typically targets college towns, which are growing as the college population increases.
Our Rick Munarriz just awarded the restaurant a bronze medal on shining second-quarter results that featured a 29% increase in revenue and a 41% earnings jump. Analysts expect that wing joints will continue their overall market growth in comparison with midrange restaurants such as T.G.I. Friday's and DineEquity's (NYSE: DIN) Applebee's and IHOP.
So that's a double win for the restaurant chain. Folks are seeking value when dining out today, and they can get it from Buffalo Wild Wings. Rising costs for chicken could cut into profits, as we've seen at McDonald's (NYSE: MCD), but with its long-term growth potential, Buffalo Wild Wings is poised to soar.
Catch Heinz if you can
Coincidence or not, H.J. Heinz (NYSE: HNZ) has delivered stock gains of more than 25% in the two years since activist Nelson Peltz shook things up. At its annual shareholder meeting yesterday, Heinz announced its plans for continued growth, including 2009 targets of 6% revenue and up to 11% in EPS expansion. In particular, Heinz is focusing on health foods and international growth to spark continued earnings increases.
With rising commodity costs, food producers are looking for any way to strengthen their standing. That's part of the reason mergers and acquisitions are big in foods today, and sure enough, Heinz is keeping its options to grow its portfolio through buyouts. Foodies such as Kellogg and Tyson are already gobbling up international companies to expand their product offerings. General Mills (NYSE: GIS), which has done well lately, went in the other direction yesterday -- it pared down its offerings by selling its Pop Secret popcorn brand to Diamond Foods.
Heinz has managed to generate increased revenue and profit gains in spite of the competitive market picture. With strong growth potential in emerging markets, the Income Investor recommendation continues to be an attractive consumer-products pick.
Keep your portfolio full
Yes, inflation is increasing, and this morning's announcement that July's Consumer Price Index increased by 0.8% isn't a huge surprise. Don't let this news scare you when it comes to the long-term investing picture. People have to keep consuming, even with the rising price pressures. And we'll keep looking at potential consumer and retail growth stars so that your portfolio won't starve in the meantime.
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