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<< Return to Part I

As we enter into this Christmas season, that can only mean one thing: Shopping. This article is meant to give a personal perspective of how the retail sector is shaping up for this year and into the future. For this experiment and research I have used the closest mall in proximity to me, the Woodland Mall.,

This mall, owned by Pennsylvania Real Estate Trust, has been open since 1968. Over 100 stores, restaurants, and kiosks operate in 1.1 million square feet. Many of the stores are privately owned or are small, local players and have been left out of this article. Let’s take a look at some of the stores entering their busiest time of the season.

All yields, share prices, and analysts’ estimates are taken from Yahoo Finance upon market close Friday, November 25. Current and next year's earnings are analysts estimates for the current fiscal year and the following one. Earnings are listed on a per-share basis.

Store: Francesca Holdings (FRAN)

Francesca is a store very different from other retailers. The stores serve as boutiques and clothing retailers. The sales of the stores split between clothes, jewelry, accessories, and home furnishings. The company rotates products many times throughout the year, as opposed to just the four seasons.

  • Competitor: Urban Outfitters (URBN)
  • Share Price: $19.00
  • Current Earnings: $1.29
  • Next Year Earnings: $1.61
  • Dividend Yield: 0
  • Number of Stores: 279 (as of 07/30/11)
  • Recommendation: Buy

I wish I could write everything I want to about the newest store inside the mall (and, coincidentally, newly traded) Francesca Holdings. This boutique store aims its products at younger women with a constantly changing floor of product to lower its inventory and raise its customer’s number of trips to a location. Shares have traded as high as $29.75 since it went public for $17 a share. Investors have a prime buying opportunity now that shares have settled back down. The company has strong expansion plans and currently maintains one of the largest sales per square foot ratios in the retail industry. I will definitely be writing about this company in the future.

Stores: Gap, Banana Republic (GPS)

Gap owns Gap stores, Banana Republic, Old Navy, Piperlime, and Athleta. The diversification of the brands helps the company appeal to both low-end and mid-range retail shoppers.

  • Competitors: American Eagle (AEO), Express (EXPR)
  • Share Price: $17.62
  • Current Earnings: $1.50
  • Next Year Earnings: $1.76
  • Dividend Yield: 2.5%
  • Number of Stores: 3,100 Company Owned, 200 Franchised (as of 11/17/11, Total Gap, Old Navy, and Banana Republic Stores)
  • Recommendation: Buy

Gap sales have been decreasing in the United States as they reach an almost oversaturation point and have lost share to competitors. The shares are undervalued now as the company, which is in over 90 countries, has large expansion plans across much of Asia. Sales have been strong in areas opened overseas over the last year. The dividend yield appears attractive in the apparel industry as well.

Store: Hollister, owned by Abercrombie & Fitch (ANF)

Abercrombie and Fitch with its Hollister and namesake Abercrombie stores, is one of the leaders in the teen retail sector.

  • Competitors: American Eagle (AEO), Aeropostale (ARO), Express (EXPR)
  • Share Price: $44.65
  • Current Earnings: $2.77
  • Next Year Earnings: $4.25
  • Dividend Yield: 1.6%
  • Number of Stores: 501 Hollister, 1100 Total (as of 10/29/11)
  • Recommendation: Buy

Abercrombie and Hollister are both priced a little higher than American Eagle and Aeropostale merchandise, but that hasn’t stopped the company in the past. Shares are right at a fifty-two-week low and traded as high as $78.25 earlier in the year. Shares are a bargain at this price and could actually see a look from private equity or a larger retail company to take it private.

Store: Hot Topic (HOTT)

Hot Topic sells pop culture and movie apparel and accessories. The stores are one of the largest placest to find accessories or images with movie characters, television characters, or musicians.

  • Competitors: I can’t find a pure play competitor
  • Share Price: $6.65
  • Current Earnings: $0.16
  • Next Year Earnings: $0.26
  • Dividend Yield: 3.9%
  • Number of Stores: 636 Hot Topic, 145 Torrid (as of 07/30/11)
  • Recommendation: Hold

Hot Topic is a small cap retailer focusing on teenagers with movie and music licensed products. The retailer has no debt and has rising profit. Sales however have dropped in the past couple of quarters. I think shares are fully priced at this level, and with declining sales I’m not sure the company can keep paying its large dividend.

Store: Justice, owned by Ascena (ASNA)

Ascena brands acquired Justice most recently to give it an entry into a new age demographic. The company now is involved in three different age groups, with Justice for tweens, Maurice's for teenagers, and Dress Barn for adults. The stores are all aimed at women.

  • Competitors: Claire’s (APO)
  • Share Price: $25.39
  • Current Earnings: $2.59
  • Next Year Earnings: $2.92
  • Dividend Yield: 0
  • Number of Stores: 2500 Total for Ascena
  • Recommendation: Buy

The company acquired Justice in 2009 and now has stores aimed at girls and women across three age groups which many retailers can not say they have. The company has zero debt on its book and over $300 million in cash. Look for the company to make another acquisition to strengthen its portfolio.

Store: Motherhood Maternity, owned by Destination Maternity (DEST)

Maternity clothes are a necessity for many women throughout the country. Destination Maternity, with its Motherhood Maternity, A Pea in the Pod, and Destination Maternity stores, is the market leader for maternity clothing. The company also sells its products in Sears, Kohls, and Kmart stores.

  • Competitors: Target (TGT), Old Navy (GPS), Kohls (KSS)
  • Share Price: $13.85
  • Current Earnings: $1.63
  • Next Year Earnings: $1.97
  • Dividend Yield: 5%
  • Number of Stores: 1725 Total Stores, 698 Retail Stores, 1027 Stores in Department Stores (as of September 30, 2011)
  • Recommendation: Buy

Destination Maternity through brands like Motherhood Maternity offer a pure play on the pregnancy market, which has remained a recession-proof industry. The company has a growing presence in other countries as well, which could dramatically increase its sales.

Store: New York and Company (NWY)

New York and Company sells its clothing and accessories to women in its stores. The target age demographic of 25 to 45 is known to love the company’s pants and the ability to buy work and casual clothes in one place.

  • Competitors: Ann Taylor (ANN)
  • Share Price: $2.25
  • Current Earnings: -$0.41
  • Next Year Earnings: $0.03
  • Dividend Yield: 0
  • Number of Stores: 542 (as of 11/17/11)
  • Recommendation: Sell

New York and Company shares have taken a hit considering they once traded for more than $20 a share (in 2006). Shares this year have dropped from a fifty-two-week high of $7.50 and don’t appear to be rebounding any time soon.

Store: PacSun (PSUN)

Pacific Sunwear competes in the teen retail segment. Stores attempt to take on personalities of the California lifestyle by selling sandals, sunglasses, and apparel that looks and feels like California.

  • Competitors: Abercrombie and Fitch (ANF), Buckle (BKE)
  • Share Price: $1.32
  • Current Earnings: -$0.88
  • Next Year Earnings: -$0.58
  • Dividend Yield: 0
  • Number of Stores: 827 (as of 04/30/11)
  • Recommendation: Sell

Pacific Sunwear is in the highly competitive teen retail industry and has struggled recently to keep up with some of its competitors. Shares are trading close to a fifty two week low but I would stay clear of this outdated stock and company.

Store: Victoria Secret, owned by Limited Brands (LTD)

Limited Brands includes Victoria’s Secret, Bath and Body Works, La Senza, and Henri Bendel. Limited Brands previously held such companies as Abercrombie and Fitch, Structure, Express, and Lane Bryant. The company has done a good job of growing by acquisitions and by spinning off assets.

  • Competitors: Hanesbrands (HBI), Fruit of the Loom (BRK-B)
  • Share Price: $38.33
  • Current Earnings: $2.52
  • Next Year Earnings: $2.87
  • Dividend Yield: 2%
  • Number of Stores: 1040 (as of 01/01/11)
  • Recommendation: Buy

Shareholders have been and will continue to be rewarded. Victoria’s Secret is a market leader and dominates the women’s lingerie industry.

Store: Wet Seal (WTSLA)

Women in the teens and early twenties are the key demographic of Wet Seal stores. Stores are located in large malls.

  • Competitors: Forever 21 (Private), American Eagle (AEO)
  • Share Price: $3.10
  • Current Earnings: $0.21
  • Next Year Earnings: $0.26
  • Dividend Yield: 0
  • Number of Stores: 550 (as of 10/29/11)
  • Recommendation: Sell

Wet Seal shares appear overvalued at this share price. The store has lost some of its appeal at its target younger women demographic. The company has no debt and is trading close to book value. While the shares may represent a turnaround possibility I would take a pass at this company.

Summary:

  • Francesca Holdings, $19.00, Buy
  • Gap, Banana Republic, $17.62, Buy
  • Hollister, $44.65, Buy
  • Hot Topic, $6.65, Hold
  • Justice, $25.39, Buy
  • Motherhood Maternity, $13.85, Buy
  • New York and Company, $2.25, Sell
  • PacSun, $1.32, Sell
  • Victoria Secret, $38.33, Buy
  • Wet Seal, $3.10, Sell

Continue to Part III >>

Source: Hitting The Mall For The Holiday Season, Part II: Clothing Stocks