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Guess? Inc. (GES), Macy's Inc. (M) and Genesco Inc. (GCO) are three retail stocks that are trading at relatively cheaper valuations compared to their peers. They have recently posted strong financial performance and analysts expect double-digit earnings growth from them in the next five years. Guess and Macy's have respectable dividend yields as well. We recommend buying these three stocks based on their upside potential.

Guess? Inc.

Guess operates in the apparel sector and caters to men, women and children. Its distribution channel includes retail, wholesale and e-commerce. It also issues licenses for manufacturing and distribution of certain apparel items. Of its revenues, 49% came from North America last year. It also has a significant exposure to Europe (37% of last year revenues).

GES' profit margin is 8.8% (trailing twelve months) compared to Polo Ralph Lauren Corporation's (RL) ~10%, The Gap, Inc.'s (GPS)'s 5.9% and Abercrombie & Fitch's (ANF) 2.5%. The growth rate for earnings was 4% per annum over the past five years, and is expected to be 11.5% for the next five years.

It also has a dividend yield of 3.1%. These dividends are sustainable as the free cash flow yield (trailing twelve months) is 6% and the payout ratio is 32%. Total debt-to-equity is 1%.

GES' forward P/E of 10x is at a discount to its peers. Abercrombie & Fitch has a forward P/E of 11.6x and Gap has a forward P/E of 15x. Ralph Lauren, which has slightly less exposure to Europe (22% of revenues last year) than GES, has forward P/E of 17x. The consensus price target is $33. Below are the valuations based on P/E multiples of 10x and 5 year historical average P/E for Guess, which roughly comes out to be 12x.

The recent price drop coming as a result of missing analyst earnings estimates makes it a good buy.

Macy's Inc.

Macy's , a mid-tier departmental store, has been impressing recently with its monthly same store sales exceeding analyst estimates. Only 15% of the revenues came from home furnishings and other consumer goods; the rest came from apparel for women, men and children.

Macy's August same store sales were 5.1%, better than analyst expectations of 3.3%. Last year, August same store sales showed a gain of 5%. All categories showed gains in sales. Much of this can be attributed to online sales through macys.com and bloomingdales.com. Online sales grew 37.4% in August (YoY) and 35.2% (YoY) for a YTD period. The growing trend towards e-commerce is a factor that will continue to benefit Macy's, which is taking initiatives to further improve its online sales.

Macy is performing better than its peers based on profit margins. The trailing twelve months profit margin for M is 5%. Saks Incorporated's (SKS) profit margin is 2.43%, J.C. Penney Company Inc.'s (JCP) is -3%, Kohl's Corporation's (KSS) is 5.6%, and Dillard's Inc.'s (DDS) 7.6%.

The company has a respectable dividend yield of 2% with a free cash flow yield of almost 6% and 19% payout ratio.

The forward P/E of Macy's is 10x and its average over the past 5 years is 15x roughly. The forward P/E of its competitors is as follows: Saks' 20x, J. C. Penney's 21x, KSS' 10x and DDS' 11x. The valuations, using analyst consensus EPS estimates, are as follows:

The lower valuations, in addition to favorable sales growth (online sales in particular), make Macy's a good pick from among its department store peers.

Genesco Inc.

Genesco operates in the apparel retail and wholesale industry (mainly footwear and accessories). The company recently gave an earnings surprise of 85% in 2Q2013 ($0.5/share as compared to expectations of $0.27). Gross margin expanded by 10 basis points, operating margin by 1.4 percentage points, and net margin by 2 percentage points. Quarterly same store sales had shown double digit growth in FY2012.

The trailing twelve months profit margin is 4% as compared to Collective Brands, Inc.'s (PSS) -3%, Foot Locker, Inc.'s (FL) 5.7% and The Finish Line, Inc.'s (FINL) 5.8%.

Analysts expect an earnings growth of 16.5% over the next 5 year. The average P/E multiple for Genesco over the past 5 years is roughly 16x. The forward P/E is 13x. At these multiples and using analyst estimates for EPS, the valuations come out to be:

The forward P/E for PSS is 13x, FL's is 14x and FINL's is 13x. The consensus target price for Genesco is $84. YTD, the stock is up 14%, but we think there is room for more appreciation. We recommend buying GCO based on its recent performance and earnings growth potential.

Source: 3 High Growth Retail Stocks To Buy