By Doug Ehrman
The retail industry has long been among the favorites of many individual investors because of the significant level of name recognition these brands carry; essentially, people appreciate owning stocks in those companies which have become household names for them. While this alone is not always a great basis to own any given stock, there is a group of all-star stocks that are worth researching, understanding and owning. The discussion below will look at six of these companies, make comparisons between them and their close competitors, and provide the basis for any buy recommendation that can form the starting point for a reader’s own research and decision-making process.
Jones Apparel Group, Inc. (JNY) – This company, which has two direct competitors (LIZ and ANN), discussed below, is attractive for different reasons. With a dividend yield of 2.2%, JNY stands as the only legitimate income play of the three. With its strong brand identity, reasonable valuation and solid operating margin of 4.6%, the company is attractive. Of particular note is the company’s price-to-earnings over growth ratio of 0.81. While the company trades at a higher price-to-earnings than ANN and LIZ, any PEG ratio below 1.0 is considered very attractive and a strong growth candidate based on valuation. With the addition of the solid income element, the elevated price-to-earnings ratio is of less significance, and the stock is an attractive addition to one’s portfolio.
Liz Claiborne, Inc. (LIZ) – While this stock makes the list of all stars because of its status as a household name, it is the one stock on this list that should simply be avoided. The company has a negative price-to-earnings ratio based on negative earnings, a negative operating margin, and its only real prospect is that a takeover bid might yield positive results for shareholders. The company has lost money in each of the past several years, and while it is making efforts at a turnaround, selling the unprofitable Mexx brand, this appears to be too little too late.
Also adding to the company’s problems is its inability to maintain branding power. While most consumers are aware of the brand, few actively seek it out. This is even more pronounced in the younger segment upon which well positioned brands must rely for growth. While the company is an all-star based on its long history in retail, the stock shows few signs on life when compared to ANN and JNY, discussed herein.
ANN, Inc. (ANN) – The third in this subset, ANN stands out for more traditional reasons – valuation and operating efficiency. Compared to its two competitors above, LIZ and JNY, ANN has the strongest valuation based on trailing price-to-earnings ratio; the company is trading at a trailing price-to-earnings ratio of 15.3 relative to nearly 40 for JNY and a negative reading for LIZ. In terms of operating margin, the company comes in at 6.8% relative to 4.6% for JNY and another negative reading for LIZ. While ANN does not offer the income element that JNY does, its solid valuation metrics make it a good addition to any portfolio.
Nordstrom, Inc. (JWN) – In this highly competitive space, JWN continues to differentiate itself from its competition – namely Macy’s Inc. (M), Dillard’s Inc. (DDS) and Saks Inc. (SKS) – through its continuing commitment to service. Understanding the pressures that have been created by discounters, JWN seems to be one of the few department-store-style organizations that understands that service is the one reason consumers still have to shop at their store.
In terms of financial metrics, JWN is very attractive. When considering the relative strength, including growth, of the valuations, JWN has a trailing price-to-earnings over growth ratio of 1.4, relative to 2.2 for M, 2.1 for DDS and 1.2 for SKS. While a reading below 1.0 is generally considered attractive, when making this comparison, it is the relative strength that is most relevant. When operating margin is included, JWN really stands apart with an operating margin of 11.9% relative to 8.5% for M, 6.2% for DDS and 4.7% for SKS. Add to this strength the fact that JWN carries a dividend yield of 1.9% - a level similar to U.S. Treasuries – and the stock becomes even more attractive. Overall, JWN remains a gem in this space, and could be a part of most portfolios.
The Limited Companies (LTD) – This stock represents one of the most significant players in retail today, spanning a plethora of important brands and operations. Most directly comparable to Gap, Inc. (GPS), the company is slightly more expensive on a pure valuation basis, when growth is included it is more attractive. The trailing price-to-earnings ratios for the two companies are 14.6 for LTD and 11.6 for GPS. When growth is added, however, the price-to-earnings over growth ratios are 1.08 and 1.39 respectively, with the advantage to LTD. While slightly above the preferred 1.0 reading, LTD is showing a strong growth element that is attractive. Both companies have similar operating margins. As an added sweetener, LTD pays a dividend yield of 2%. When all these factors are put together, the stock looks very attractive.
Coach, Inc. (COH) – Standing as one of the true remaining luxury powerhouses, Coach has managed to maintain its mystic as an aspirational brand without making significant cuts to quality. While the company has been willing to explore various price-point levels, and make adjustments to attract different buyers and expand the brand’s penetration, it has remarkably not lost its focus on quality and excellence. The result is that the operating results have consistently showed some of the highest margins in any business in the market. With a dividend yield around 1.7%, the stock also makes an interesting income play and should be considered in this light as well. In terms of comparisons, the bulk of the company’s direct competition is private, meaning that financial metrics are not readily available. The company has an operating margin of 31.4% which is several multiples above the industry average of 7.2%. Overall, with the strong brand focus, excellent management, and solid income component and significant operating efficiency, COH looks like a strong buy at these levels.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.