In case you hadn't heard, the U.S. Chamber of Commerce says a recession is likely by the end of the year. Well, you don't say!
I always like a good buy, but with the economy tightening, the rest of America is moving toward price-conscious shopping, too. You can see the proof at bargain-basement retailers and consumer-product companies, which are prospering in the wake of those stimulus checks. Big Lots (NYSE:BIG) and Dollar Tree (NASDAQ:DLTR) have recently posted great numbers as more Americans look for cheaper products to stay afloat.
Discount restaurants, consumer goods, and retail companies may just be great investing opportunities for the long term, so we'll look at three smaller companies providing products at reasonable prices. With the lending environment being what it is, minimizing debt can be a sign of strength, so this week's picks are also debt-free.
Hot dogs for cheap eats
Nathan's Famous (NASDAQ:NATH) is probably known best for those disgusting hot dog-eating contests, but the company has been gobbling up sales growth for investors. The restaurateur has grown revenues and earnings at an annualized rate of 10.2% and 34.7%, respectively, over the past three years.
Even more impressively, Nathan's Famous sports an impressive 12.9% operating margin, which trounces the margins of small fast-food joints such as Jack in the Box and CKE Restaurants and worldwide behemoths such as Yum! Brands (NYSE:YUM). Nathan's seems well-positioned with its menu of hot dogs and its Arthur Treacher's Fish & Chips chain. The Motley Fool CAPS community agrees, giving Nathan's Famous a five-star rating.
Cherokee dresses up
Cherokee's business model focuses on acquiring names such as its flagship Cherokee, Carole Little, and Sideout Sport brands, then licensing them out to retailers such as Target (NYSE:TGT). So those $8.99 Cherokee T-shirts featured at Target aren't actually produced by Cherokee -- it just owns the rights to the brand.
Cherokee's stock has taken a hit -- the stock sits 44% off its 52-week high, with a trailing price-to-earnings ratio of 12.5. But the licensing setup is outrageously profitable, with a five-year average profit margin of 42.7% and a return on investment of 73.1%. The company expects North American revenue to decline by as much as 15%, but it's busy focusing on global growth, which contributed 52% to the company's fiscal 2008 top line.
Cherokee had been working with Goldman Sachs on a potential sale, but it held off and ended up offering a $0.50-per-share dividend instead. With barely any capital expenditure required under its business model, the company is rolling in the free cash flow it receives from its high-margin royalty revenue. Throw in its debt-free balance sheet, and Cherokee looks particularly attractive.
Bargain shoes
DSW (NYSE:DSW) announced second-quarter earnings yesterday, and the outlook for the shoe retailer was mixed. Same-store sales for the quarter dropped by 6.9%, and the company expects the trend to continue for the rest of the year. Inventory has increased by more than 9% since February, and operating expenses increased 14.2% over last year. The good news is that net income increased by 68%, and cost of goods sold dropped by 4.2%.
As consumer weakness continues to settle in, the near-term prospects aren't exactly alluring. In fact, this stock has dropped more than 50% over the past year, and it now sells at just 14 times this year's expected earnings. Like Fool Timothy Otte, I've had my eye on DSW as a long-term investment; I belive it will successfully weather the current market conditions, and take off again once the economy works out its kinks.
Value is the "in" trend right now. Although we're always looking for long-term investing opportunities at the Fool, discount retailers, consumers, and restaurants at a low price have great potential, even if the market isn't at its bottom.
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