Summer's over. You see it in the glum faces of school-bound children. You see it in the maddening mall crowds. The weather might still be blazing, but you can't deny the season's changing.
It's time for back-to-school shopping, and it's obvious why everyone is keeping an eye on the retail sector. Is the economy bouncing back? Will folks be confident enough to open their pocketbooks?
Earlier this week, bellwethers such as Wal-Mart (NYSE: WMT) and Federated Department Stores (NYSE: FD) reported that August sales weren't running as briskly as they'd hoped. It's too hot for the bundled fall fashions, and, let's face it, folks are still tight-fisted when it comes to handing over the plastic.
But not every retail chain has had a rough go of things lately. Some have flourished. Others may have languished but seem to be turning the corner, despite rock-bottom market valuations. Many of these promising retail stocks also provide investors easy entry access with dividend reinvestment plans. Let's take a look at a few of these prospects.
Pier 1 (NYSE: PIR) -- There's little not to like about Pier 1 Imports. The home furnishings specialist has thrived, as folks have refinanced their mortgages and used their monthly savings to spruce up their homes. Beyond the wicks and wicker, Pier 1 has also redecorated its own homestead, financially. The company has grown its chain with enough spare cash left over to pay down debt, buy back stock, and grow its dividend. That's a cash flow trifecta one shouldn't dismiss lightly.
The bottom line is also more rattan than rotten, with earnings projected to climb by 24% this year to $1.29 a share. With estimates being raised higher lately, the company appears to be a steal at just 12 times next year's income target of $1.47 a share.
J.C. Penney (NYSE: JCP) -- Here's a Penney for your thoughts. While most retailers had to water down their back-to-school revenue projections earlier this week, the J.C. Penney Stores bucked the trend with an upward surprise. The company's slogan is, "It's all inside," and that's appropriate for the stock as well, because you have both the good and the bad wedged into the company.
Comps have been strong this month, but they were languishing in negative territory earlier this summer, due, in part, to inventory hiccups. The company's catalog sales are eroding quickly as well. However, Penney also has a gem in the Eckerd drugstore chain. With pharmacy sales booming, Eckerd comps have been up smartly over the last few years. This past quarter, Eckerd sales nearly rivaled the company's namesake stores, in terms of slicing up the revenue pie. While the drugstore industry suffers from tight gross margins, low overhead costs lead to attractive operating profits relative to the bigger department store boxes.
J.C. Penney isn't perfect, but with its drugstore anchor of stability and a healthy 2.8% yield, it's certainly not a stock to overlook, despite its slow growth traits. Fetching just 10 times next year's profit estimates, maybe that Penney for your thoughts would be worth more in your portfolio.
Michaels Stores (NYSE: MIK) -- A lot of stocks wish they could be like Mike. The company's shares have quadrupled over the past two years, and with good reason, as the arts and crafts chain has been on a fiscal tear. The company has beat out analyst projections every single quarter over the past year. With the trend clearly erring on the side of outperformance, bottom-line targets calling for Michaels to earn $1.94 a share this year and $2.30 a stub next year ultimately may be conservative.
The economy has played into the company's lap, with cost-conscious shoppers creating their own arts and crafts enhancements for the home. You'll have better luck finding yarn than yield here, since the company doesn't pay out a dividend. However, the company offers one of the few fee-free Drips where investors can add to their stake in the company without a commission.
Target (NYSE: TGT) -- Was I right on Target? Those who picked up Industry Focus 2002 in December found me singing the praises of the country's third-largest discount retailer. The hippest of the lot, Target performed well earlier this year. While the stock has been roughed up since May, it's trading for essentially what it was going for back in December. I'm not limber enough to pat my own back over a zero-sum stock pick, though. Relative to the market, it could've been a lot worse.
Combining colorful, trendy fashions with the low overhead discounting mindset, Target has delivered the goods this year. Last week the company reported a 27% gain in second-quarter profits, and while it's cautious about how the rest of the year will play out, it's still comfortable with its full-year earnings forecast of $1.83 a share.
With consumers still weary about overspending until the economy shows renewed signs of life, the discount department store chains should continue to do well. And, unlike Kmart (NYSE: KM) and, to a lesser extent, Wal-Mart, the back-to-school fashions at Target won't be a begrudgingly worn purchase over the higher-priced specialty retail alternatives at the mall.
So, there you have it. You can learn a lot by hitching a ride on a shopping cart these days. If you follow the shopper, you follow the money. No need to go back to school to figure that out.
Rick Aristotle Munarriz wasn't born to shop until he drops. But he was born to save until the grave. Rick's stock holdings can be viewed online, as can the Fool's disclosure policy.
