6 Retail Stocks Poised for Breakout Profits

by: Investment Underground

By Larry Gellar

The retail sector has been struggling as of late due to a failing economic recovery. Additionally, merchandise costs have risen, and this has hurt margins across the board. Today, we take a look at six retail stocks that may still have a chance to succeed.

The Jones Group, Inc (NYSE:JNY): This seller of apparel and footwear traded down 1.41% to $12.62 at the time of writing, way off its 52 week high of $20.58 on October 13, 2010. Despite the downward movement, this still represents a very high P/E ratio of 53.84. Note that competitors like AnnTaylor Stores (NYSE:ANN) and Brown Shoe Co. (BWS) trade at 18.46 and 13.33 times earnings respectively.

Additionally during the second quarter, JNY’s profit fell 80% from last year to $5.2 million. Costs related to the company’s purchase of Kurt Geiger was one factor that counteracted revenue growth.

When evaluating this company, it’s important to understand that JNY’s strategy is generally to focus on core brands with good growth prospects, such as Jones New York, Nine West, and l.e.i.. This plan has shown signs of success, which we believe will continue as the global economy improves. In addition, recent declines in cotton prices should help lower costs going forward.

JNY has also done a good job in other aspects of its business. It is actively closing retail locations that are underperforming as well as taking a second look at leases that are up for renewal. The company plans to shut an additional 20 locations by the end of the year to bring total closures to about 85 for 2011.

While JNY is moving in the right direction with its recent business decisions, we would recommend sitting on the sidelines until a bit more clarity emerges as to the success of recent moves. For the time being, we would not recommend adding to positions.

Liz Claiborne Inc. (LIZ): LIZ is both a seller and designer of a wide variety of clothing. Shares were down slightly to $6.28 at the time of writing, which is somewhat lower than its 52-week high of $7.75 on December 22. This brought the company’s price-to-sales ratio down to 0.24, which is quite low compared to companies like Benetton Group SpA (OTC:BNGPY), The Jones Group (JNY), and Polo Ralph Lauren (NYSE:RL).

LIZ also recently posted a net loss of $90 million for the second quarter, compared to a net loss of $87 million a year earlier. The company did experience a 3.5% rise in sales though, which brought revenue up to $556 million.

We believe that LIZ’s moves from 2010 will allow it to compete more effectively on a global basis. Lines like Kate Spade, Lucky Brands, Juicy Couture and Mexx will ultimately prove successful. In addition, exclusive distribution of the company’s Liz Claiborne and Claiborne brands to JC Penney (NYSE:JCP) is enjoying quite a bit of success. This should continue to bolster the company’s women's apparel sales.

However, since these strategies are in the incubation stage, we again await clarity in upcoming quarters. We would not recommend adding to positions until the picture improves.

AnnTaylor Stores Corp. (ANN): ANN is a women’s clothing retailer, known particularly for its Ann Taylor and LOFT brands. Shares moved down 0.62% to $25.63 at the time of writing. This represents a significant discount from its YTD high of $32.00 and also puts the company’s P/E ratio at 18.83. This P/E is around average for the apparel industry, but P/S is relatively high, currently 0.64.

Like competitors The Talbots Inc. (NYSE:TLB) and Chico’s FAS (NYSE:CHS), ANN is working hard to right-size its store portfolio, which in this economy has amounted to closing locations where necessary. Additionally, it is keeping close tabs on inventory management and constantly reevaluating its product sourcing requirements in an effort to reduce costs. ANN has also been successful at increasing sales from outlet stores and online shopping, both of which contribute to lower costs.

We like ANN's virtually debt-free balance sheet, especially in these economically uncertain times. On the other hand, cash flow has not been strong lately. Notably, the company experienced a $122 million net outflow for the quarter ending 4/30. ANN has had very erratic earnings performance over the past 5 years, giving us cause for concern. Given today’s precarious consumer environment and the level of competition within the apparel arena, we would not recommend adding to positions.

Nordstrom Inc. (NYSE:JWN): Founded in 1901, this upscale retailer sells a variety of merchandise with a focus on apparel. Shares were down 2.99% to $48.47 at the time of writing, which is a bit lower than its July 19th YTD high of $51.79. In addition, JWN trades at a P/E ratio of 16.8 and offers a 1.80% dividend yield.

JWN has had positive momentum, as it recently reported its sixth consecutive quarter of increases in same-store sales. Total sales have also been improving significantly. The company has attributed its success to efforts to improve the customer experience. Nordstrom executives have also spoken highly of its inventory management and have revealed plans for store expansion as well as other growth opportunities.

We believe JWN is enjoying improved confidence among its wealthier clientele. The company also seems to be reaching new customer segments through investment in online shopping and expansion into lower-priced products.

Despite the unsettling possibility of the U.S. economy falling into a double-dip recession, we like JWN’s business model and believe that investors should strongly consider buying this stock. If nothing else, JWN is certainly an interesting play because its biggest competitors, Bloomingdale’s, Neiman Marcus, and Saks Fifth Avenue, are all privately owned companies.

Limited Brands, Inc. (LTD): LTD sells a variety of women’s products throughout North America and is perhaps best known for its Victoria’s Secret line. Shares were down slightly to $37.19 at the time of writing, down from May highs. LTD trades at a P/E ratio of 14.4, which is a bit higher than competitors like Gap (NYSE:GPS) and Hanesbrands (NYSE:HBI). Additionally, the company offers investors a 2.10% dividend yield, which is about average for this industry.

LTD had strong performance in the first quarter of 2011 despite a retail environment that the company admits is uncertain. Specifically, net sales increased by $285 million to $2.217 billion and were sparked by a comparable store sales increase of 15%. The next earnings release comes on August 17th, so look for that to be an important factor in the stock’s performance.

We believe LTD’s long-term growth opportunities include potential line extensions, creation of sub-brands, and global expansion via ecommerce. On the other hand, we are concerned that LTD would issue $1 billion of debt and use $590 million of the proceeds to repurchase common stock. This move raised an already high debt level but shows the company’s confidence in its equity if nothing else. We would advise current shareholders to hold the stock for the time being.

Coach, Inc. (NYSE:COH): Coach makes a variety of accessories and is quite well-known for its handbags. Shares were down 4.88% to $62.13 at the time of writing, which is a bit lower than its 52-week high of $67.62. COH has a P/E ratio of 21.6 and offers investors a 1.40% dividend yield. Coach is another company whose main competitors are all privately owned, which makes it a bit more difficult to compare P/E ratios. Regardless, this P/E does not seem unreasonable, and we suspect that companies like Dooney & Bourke, Kate Spade, and Michael Kors would have similar ratios if they were traded publicly.

We like COH because so much of its business model is based on international distribution, which prevents it from being at the mercy of one particular geographic area. The company’s wide range of products also helps to reduce risk.

More specifically, COH is focused on two key growth strategies. The first is to increase global distribution while maintaining strong sales in North America. Additionally, they are focused on improving store productivity. However, the current economic environment continues to present a challenging retail market in which consumers, especially in North America and Japan, remain cautious.

Despite the potential headwinds, we are swayed by COH’s virtually debt-free balance sheet and strong cash position. In addition, the company should be well equipped to take advantage of profitable growth opportunities. Investors should strongly consider buying this stock.

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