Retail Stocks: 2 Undervalued Plays In A Hard Hit Sector

 |  Includes: GMAN, PIR
by: Justin Kuepper

U.S. equity markets have been hit hard over the past couple of weeks, thanks to ongoing problems in the eurozone and lackluster economic data at home. Since they are particularly reliant on the economy, consumer discretionary and retail stocks have been hit especially hard, creating a bargain for investors who know where to look.

While many consumer discretionary and retail stocks may be due for a rebound, there are two names that are particularly undervalued when it comes to growth, value and performance. Pier 1 Imports Inc. (NYSE:PIR) and Gordmans Stores Inc.(NASDAQ:GMAN) are two great value stocks that have suffered a bit in recent times, but may prove to be a bargain over the long-term.

Pier 1 Imports Drop Creates Opportunity

Pier 1 Imports Inc., a specialty retailer of decorative home furnishing and gifts, has plummeted nearly 11% over the past month after reporting lower than expected earnings. Despite what the stock's move would suggest, the earnings report was actually fairly positive, and the move left the company's shares trading at a significant discount to the market.

Last quarter, the retailer announced top-line same-store sales that increased an impressive 7.2% on top of last year's 10.2% gain, as well as bottom-line earnings that increased from $0.12 to $0.16 per share. Meanwhile, the company's new website and "Pier 1 To-You" project is entering its final stages in a move that could unlock further value moving forward.

The company also appears to be significantly undervalued with a price-earnings to growth ratio of just 0.84x, according to Yahoo! Finance, suggesting the stock is undervalued given its growth rate. Meanwhile, the firm's return of equity of 37.27%, strong balance sheet and positive cash flow suggest that it's a great long-term performer despite the recent weakness.

Gordmans Stores Appears Undervalued

Gordman Stores Inc., an everyday low-price department store retailer featuring a wide selection of discounted brand names, has been a strong performer in 2012 with a 37.23% gain. But its recent drop from around $22 to around $17 has created a buying opportunity for investors.

Last quarter, the retailer reported in-line financial results that included a 14% increase in top-line revenues and a 7.9% increase in bottom-line earnings per share. While margins were slightly pressured during the quarter, there was only a 20 basis point difference that was largely attributed to reduced consumer spending.

The company also appears to be undervalued with a price-earnings to growth ratio of just 0.80x, according to Yahoo! Finance, suggesting it's undervalued given its growth rates. Meanwhile, the firm recorded a strong 35.61% return on equity and a debt-to-equity ratio of just 0.61x, meaning that it appears that it will be a stable long-term performer.

Risks & Alternative Investments

Consumer discretionary stocks may be undervalued, but that doesn't mean they will appreciate in value over the near-term. In fact, worsening employment data could indicate a more strained consumer than previously thought. And slower consumer spending could hurt retailers even more over the coming quarters, leading to an even greater discount.

Investors looking for more prudent exposure may therefore want to consider long-term equity anticipation securities, or LEAPS, in lieu of stock in order to reduce the amount of committed capital. Alternatively, investors can write covered call options against a long stock position in order to reduce their exposure and breakeven point over time.

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