Many U.S. retailers posted disappointing October sales on Nov. 2nd, raising concerns that consumer spending during the upcoming holiday season will be weak. But weakness also offers opportunities. Our search zeroed in on the strong earnings growth of Coldwater Creek Inc. (NASDAQ:CWTR), which recently appeared on the Reuters Select stock screen for Relative Growth.
Out of the 143 companies in the Reuters.com universe that fill the apparel, department store, catalog & mail order, and tech retail industries, only eight recently landed on at least one Reuters Select stock screen. (Click here for an Excel sheet comparing these companies.)
It would be tempting to look at the companies on the list that recently registered on the screens and delete the names that posted weaker-than-expected October sales. But, it is important to remember that one month does not make a trend. To omit the companies that are caught in a deteriorating earnings trend, we turned our attention to changes in analyst estimates and removed all the companies where, after rounding to the nearest penny, the present consensus for current-year earnings per share [EPS] is lower than it was four weeks ago and where that figure is lower than the estimate from another four weeks back. We also want companies that are expected to post earnings per share and not losses, so we deleted names where analyst EPS estimates were in the red. This left us with a list of four companies, all of which were in the retail-apparel industry.
A key factor impacting earnings is the profit margin. Wider profit margins allow more revenue gains to make their way to the bottom line and boost EPS. Since the pre-tax and net profit margins can be impacted significantly by factors outside of typical operations, we decided to focus on the operating profit margin.
While it would be easy enough to just filter for companies that widened their profit margins in the trailing 12-month [TTM] period from their respective five-year averages, one should realize that the industry average operating margin has improved during this time. As a result, we filtered for companies where the ratio of its operating margin to the industry standard improved in the TTM time frame from the five-year ratio. This resulted in two companies.
Then we turned our attention to revenue and EPS growth rates and focused on the company that is growing faster than the industry average over the TTM span. This is where Coldwater Creek, a specialty retailer of women's wear and accessories, won out. As indicated below, its revenue and EPS growth rates during this period easily exceeded the industry averages.
These growth rates also helped Coldwater Creek register on the Relative Growth screen, which seeks companies that are growing their earnings at a clip that is faster than their revenue growth.
The screen begins by looking for acceleration in the pace of top-line improvement. As indicated above, Coldwater Creek has done a good job of enhancing its revenue growth in the TTM span when compared with its five-year average. And its pace in the most recent quarter [MRQ] is faster yet. The screen then turns to earnings. As indicated above, Coldwater Creek's EPS growth rate has surpassed its revenue growth in the five-year, TTM, and MRQ periods.
The company's fast EPS growth also allowed Coldwater Creek to meet the final requirement of the Relative Growth screen: MRQ EPS growth must be faster than the industry average and the company's own TTM pace.
It is important to remember that vast growth rates are unsustainable. Still, analysts, on average, are optimistic that Coldwater Creek will continue to expand at a solid clip. According to a recent Reuters poll, analysts expect EPS to climb nearly 39 percent from 70 cents in fiscal year ending January 2007 to 97 cents in fiscal year 2008. Further, analysts believe that the company can grow its earnings at an average annual clip of about 32 percent over the long haul.
At the time of publication, Erik Dellith did not own shares of any company mentioned in this article. He may be an owner, albeit indirectly, as an investor in a mutual fund or an Exchange Traded Fund.
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