Finding Bargains at Retail: 8 Apparel Companies to Watch

In our previous Seeking Alpha article, where we defined a new value screen using the Screener.co stock screener, I mentioned that it makes sense to dive deeper into the retail sector given the number of retail companies returned by the screen. In fact, there are enough interesting companies in the apparel segment alone to justify a follow-up focusing on that segment, specifically. We can use the Screener.co tool again to limit our scope to the Apparel segment and run a value screen designed to uncover potential bargains in that limited universe. We can limit our scope to US-traded companies and create the following screener conditions:

Field	op	Criteria
Exchange Traded On	!=	"Over The Counter"
Industry	=	"Retail (Apparel)"
Revenue Change-TTM over TTM	>	0.05
Revenue Change-year over year	>	0.05
Current EV/EBITDA	<=	7

We are looking for companies that have reported growth coming out of the recession but are still trading for less than 7x EBITDA. As of 4/9/2011, this screen returns 8 results, all of which seem worthy of additional analysis. The companies are:

Symbol	Company Name
GES	Guess?, Inc.
CRI	Carter's, Inc.
ARO	Aeropostale, Inc.
ANN	AnnTaylor Stores Corp.
SCVL	Shoe Carnival, Inc.
JOSB	Jos. A. Bank Clothiers, Inc.
CTRN	Citi Trends, Inc.
ASNA	Ascena Retail Group Inc

Guess (GES) is the famous jeans brand and also sells other apparel for all demographic groups. It is currently yielding 2.0% and has an EV/EBITDA ratio of 6.9x and a 16.9% YoY revenue growth rate. According to Yahoo Finance, analysts project substantial revenue and EPS growth for 2011 and 2012. Given that the company is at the upper end of our EV/EBITDA filter, it is trading at more of a growth-company valuation than I am typically comfortable with. However, with an almost 17% revenue growth rate YoY and substantial growth projected for 2011 and 2012, this is not unreasonable. GES has a healthy balance sheet, with over $1B of net tangible assets and current assets less total liabilities of over $500M. It also has a strong recent track record of both revenue and earnings growth over the last two full years. It is worth looking at GES in the context of the other companies on the list, to compare relative valuations.

Carter's (CRI) sells baby and toddler clothing. It has an EV/EBITDA ratio of 6.1x and a 10.0% YoY growth rate. As a result, it is trading at a lower multiple than GES but has a correspondingly lower growth rate. Looking at the company's analyst estimates on Yahoo Finance, the company has an estimated 5 year forward growth rate of 10%. Carter's has a reasonably strong balance sheet, with $238M of net tangible assets and $139M of current assets less total liabilities. Like GES, the company grew revenue and net income for each of the last two years.

We covered Aeropostale (ARO) is our previous Seeking Alpha article. The company is trading at an EV/EBITDA ratio of just 4.1x despite having a 7.6% YoY revenue growth rate. Yahoo Finance reports substantial growth projected for 2011 and 2012. The company grew revenue and earnings each of the last two years and has a healthy balance sheet, with over $432M of net tangible assets and current assets less total liabilities of $129M. Relative to GES and CRI, ARO looks relatively undervalued on an EV/EBITDA basis.

AnnTaylor (ANN) is a women's apparel retailer. The company has a 6.3x EV/EBITDA and a 8.3% YoY revenue growth rate. Its most recent annual revenue was below its level of two years ago, however. Like the prior three companies, ANN has a healthy balance sheet; it has net tangible assets of $423M and current assets less total liabilities of over $46M. While analysts project strong growth for 2011 and 2012, according to Yahoo Finance, I am somewhat concerned that the company's fortunes seem more tied to the economic cycle than several of the other companies in the list, and its valuation multiple is still near the high end of our range.

Shoe Carnival (SCVL) is a footwear retailer. It has an EV/EBITDA ratio of 5.5x, a YoY revenue growth rate of 8.3%. Its balance sheet is strong and, according to Yahoo Finance, analysts project continued revenue and earnings growth over the next two years, though only 5.6% revenue growth this year and 6.8% the following year. As a result, both its valuation multiple and projected growth rate fall somewhere in the middle of the pack. With a total market cap of $357M, SCVL is a smaller company than any of the aforementioned retailers.

Jos. A. Bank (JOSB) is a men's clothing retailer than has an EV/EBITDA ratio of 6.8x and a YoY revenue growth rate of 11.4%. It has over $482M of net tangible assets and over $343M of current assets less total liabilities. According to Yahoo Finance, it has 11% revenue growth projected for this year and 10.4% projected for the following year. Like GES, its valuation multiple is almost at our threshold but its anticipated growth rate is higher than most of the other companies on this list.

Citi Trends (CTRN) is an urban fashion retailer. Despite posting a YoY drop in Q4 net income, its YoY and TTM revenue did grow more than 5%, allowing it to meet our screen. YoY, it grew revenue 12.8%! With a 5.2x EV/EBITDA ratio, its valuation multiple is below average among the companies on the list. However, given its recently reported disappointing margins and January sales, however, I would probably take a cautious wait-and-see attitude with this one.

Ascena Retail Group (ASNA) is a women's clothing retailer. It has an EV/EBITDA ratio of 5.8x and a whopping 59% YoY revenue growth rate. It is expected to grow revenue over 20% in the current year and an additional 5.1% the following year, according to Yahoo Finance. With over $600M in net tangible assets and current assets less total liabilities of $78M, the company has a healthy balance sheet.

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

Source: Finding Bargains at Retail: 8 Apparel Companies to Watch