2 Highly Profitable Retail Stocks With Conservative Accounting Practices

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 |  Includes: GME, JCP
by: Kapitall

This is a follow-up to a list we generated a few days ago (Top 20 Most Profitable Retail Stocks). In that list we identified 20 retailers that have been more profitable than their competitors over the last five years, when comparing gross and net profit margins.

Of course, accounting statements don't always paint an accurate picture, so we decided to incorporate the forensic accounting ratings developed by Audit Integrity.

Audit Integrity was founded in 2002 to develop risk management tools based on a statistical analysis of corporate integrity. The Accounting and Governance Risk (AGR) rating is a forensic measure of the transparency and reliability of a corporation’s financial reporting and governance practices. The closer the score is to 100, the more conservative the company's accounting practices, according to Audit Integrity.

The two companies mentioned below have the highest AGR scores in our starting universe. Both of them have AGR scores above 70, i.e. more conservative and transparent accounting practices than most other firms.

Profitability data and industry comps sourced from Reuters, short float and performance data sourced from Finviz, accounting data from Audit Integrity.

Interactive Chart: Compare the performance of J C Penney (NYSE:JCP) and GameStop (NYSE:GME).

1. J. C. Penney Company, Inc. (JCP):

Department Stores Industry. Market cap of $7.65B.

Profitability Analysis: 5-year average gross margin at 38.6% vs. industry average at 23.1%. 5-year average net profit margin at 4.26% vs. industry average at 1.08%.

Accounting Risk: According to Audit Integrity, the company has Average accounting and governance risk, with an AGR score of 72.

Other Sentiment Data: Short float at 9.94%, which implies a short ratio of 5.09 days. The stock has gained 33.15% over the last year.

Recent Developments: Announced actions to maximize profitability including closing several stores, ending its outlet operations, and consolidating its Call Center (Jan. 2011). Announced the Board elected Michael P. Dastugue to become CFO and Executive Vice President (Jan. 2011).

2. GameStop Corp. (GME):

Electronics Stores Industry. Market cap of $3.19B.

Profitability Analysis: 5-year average gross margin at 26.54% vs. industry average at 21.25%. 5-year average net profit margin at 3.96% vs. industry average at 1.53%.

Accounting Risk: According to Audit Integrity, the company has Average accounting and governance risk, with an AGR score of 71.

Other Sentiment Data: Short float at 26.38%, which implies a short ratio of 10.58 days. The stock has gained 5.52% over the last year.

Recent Developments: Reiterated their previously announced fourth quarter and FY2010 EPS guidance (Jan. 2011). Announced the launch of free Facebook game, Utopia Kingdoms (Dec. 2011).

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.