Christmas now sits just two months away, and while many of us are just starting on our wish lists, I've been digging through a sea of retailers who could benefit from a strong showing this holiday season.

It's no secret that many retailers rely on this key time of year to deliver the majority of their profits, so I used the following criteria to come up with three retailers that stand out above the competition:

  • Five-year expected growth rates > 10%
  • Shareholder equity increases over the last three years
  • Cash on hand > 10% of current price

It's important for retailers in today's economy to carry solid balance sheets, just in case the economy weakens, so I was looking for a strong cash position. It's also imperative that these companies outpace their competitors' growth while still expanding shareholder equity.

Here are the results:


5-Year Expected Growth Rate

Shareholder Equity Increase Last 3 Years

Cash on hand / Current stock price

Aeropostale (NYSE: ARO) 13% 47% $3.22 / $24.56
Volcom (Nasdaq: VLCM) 18% 51% $4.30 / $16.30
Zumiez (Nasdaq: ZUMZ) 22% 55% $2.98 / $27.90

Source: Yahoo! Finance and Capital IQ.

Interestingly enough, the trend here hints toward strength in teen retailers. These retailers have the pricing power to undercut their competition, yet also have an easily recognizable brand name that continues to draw in shoppers.

Catering to teens
Aeropostale understands this best; it's done an excellent job of catering to the teen segment. Today's price-conscious consumer is looking for a good value, and Aeropostale's considerably lower price points compared to competitors Abercrombie & Fitch (NYSE: ANF) and Nordstrom (NYSE: JWN) help it pull in greater teen market share. As fellow Fool Alyce Lomax pointed out, Aeropostale has shown full-year same-store sales growth in each of the past three fiscal years.

The other part of its success can be attributed to a conservative management team. By keeping up on popular trends and maintaining a strong cash position, the company has grown rapidly while keeping costs under control.

Quietly, Aeropostale has more than doubled its book value over the last three years, while trading at a lower forward earnings ratio than its closest competitors. This retailer could be one to own this holiday season.

Surf's up, dude!
Volcom, much like Aeropostale, focuses its attention on active young men and women. Its product line includes clothing, footwear, sunglasses and other accessories specifically geared toward surfers.

One of its strongest selling points is CEO Richard Woolcott, a surfing legend himself. Having someone heading Volcom who understands the industry firsthand, and who has also worked for its closest competitor, Quiksilver (NYSE: ZQK), makes for a company that really stands out. Volcom's brand is easily recognizable for today's youth, and that brand recognition can translate into sales without excessive advertising.

Volcom kickstarted its growth with its 2008 purchase of sunglasses-maker Electric, which showed 40% year-over-year growth in its most recent quarter. In addition, Volcom has not been shy about its expansion plans in Europe. Although Europe comprises only 22% of sales through the first six months of 2010, European gross margins have thus far been showing encouraging growth, and should be a catalyst moving forward. These figures suggest that Volcom could be riding a rising wave this Christmas.

Packing the powder
Volcom isn't the only company targeting a younger audience from an active-sport perspective. Zumiez, a Volcom customer, is a thriving niche player in the snowboarding market.

Recently, Zumiez has ridden the strength of a well-diversified product line. It showed a 17% jump in September same-store sales and raised its quarterly earnings guidance amid stronger profit margins. In contrast, in its most recent quarter, retail competitor Hot Topic (Nasdaq: HOTT) reported a same-store sales decline of 6.4%

Zumiez is not shy about throwing its revenue toward opening new stores. It expects to add 25 in 2010, after opening 34 in 2009. Its aggressive growth ties up a lot of free cash flow, since much of Zumiez's profit is used to get these new stores up and running. But what the company lacks in free cash flow margins, it more than makes up for with cash on the balance sheet.

Unlike Volcom and Aeropostale, Zumiez is trading at forward P/E ratios greater than the industry average. While this does allude to the possibility that Zumiez could be getting ahead of itself, I don't think you can argue against its impressive same-store sales growth. As long as it keeps drawing in customers with a solid product mix, there's sound reasoning for the stock to move higher.

Hand over the credit card
All indications from these retailers show strength coming from younger shoppers. Teen retailers may deserve a spot in your portfolio, as mom and dad's credit cards wind up in the pockets of more teen shoppers throughout the coming holiday season.

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Fool contributor Sean Williams does not own shares in any companies mentioned in this article. You can follow him on CAPS under the screen name UltraLong. Volcom and Zumiez are Motley Fool Hidden Gems recommendations. The Fool owns shares of Volcom and Aeropostale. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.