Today, we add teen-oriented apparel retailer The Buckle (NYSE: BKE) to our Best Ideas list.

Investment Highlights

Gymboree Investment Highlights

• Children's apparel has a necessary replacement cycle.

By nature, children's apparel needs to be replenished several times a year, usually by a mature female demographic with a propensity to spend on their children. Yes, the Gymboree brand carries higher price points than its publicly-traded specialty competition -  Carter's (CRI) and Children's Place (PLCE) - and the mass channel private labels.

Since it is a relatively slow retail news week, we thought it might be worthwhile to publish a list of our favorite consumer stocks. Given the significant number of headwinds facing consumers (such as record high gas prices, declining home values and the corresponding "wealth effect," and lingering credit concerns), we concede that at this time, this space may not be appropriate for all investor. That being said, we still believe there are a number of compelling investment ideas to be found in this sector.

In this post, we will look at video game retailer, GameStop (NYSE: GME).

We were pleasantly surprised by the 1Q08 results that Shoe Carnival's (SCVL) released yesterday. The company delivered sales of $162M (comparable store sales fell 4.9%) and EPS of $0.38, better than what we had anticipated in our preview post. The stock also fared much better than expected, rising almost 7% to $13.93.

With so much noise in the marketplace regarding consumer constraints (especially Shoe Carnival's moderate-income family audience), it's easy to forget that there are smart, seasoned management teams that have weathered difficult economic climates before. Though it can be argued that retailers haven't seen an environment this challenging in over fifteen years, we believe Shoe Carnival's management has done an admirable job keeping margins at somewhat respectable levels. A few areas in particular stand out from the quarter, including expense controls [SG&A on a dollar basis came in flat to 1Q07 at $39M] and inventory management (flat on a per door basis).

Earlier this morning, DSW (DSW) reported 1Q08 results that were essentially in-line with expectations. The company generated $0.23 per share, missing the consensus estimate by a penny, and reiterated its full-year earnings guidance range of $0.75-$0.85.

At first glance, management's fiscal 2009 EPS guidance range (representing a 30%-38% decrease y/y) seems overly conservative. However, the company faces stiff headwinds from not only the deleveraging effect that negative single-digit comps will have on the occupancy expense line item, but also e-commerce channel development costs and IT improvements. Because of these incremental expenses, management expects operating expenses to increase by at least 200 basis points throughout the balance of the year (or more than 22.5% of sales), making it incredibly difficult to outperform earnings expectations. Disciplined inventory management should offset some of the impact, but we doubt it will be enough for the company to significantly exceed its outlook for the year.

It's a holiday-shortened trading week, but there are a number of retailers reporting 1Q08 results in the coming days. We're going to take a look at a few footwear retailers today, as this has been one of the most volatile sectors in retailing over the past month and seen a fair amount of institutional shareholder turnover.

DSW (NYSE: DSW)
DSW will report full 1Q08 results Thursday morning before the market opens and host a conference call at 8:00 am EST (Dial-in: 800-706-7748, Pwd: 70368480). Management already reported 1Q08 sales of $366M and a same-store sales decline of 5.4%, and introduced full-year EPS guidance ($0.75-$0.85) that fell well short of analyst expectations. The stock has been subsequently penalized by the market, falling from $15 to its current price in the low $13 range (16x-17x the midpoint of the fiscal 2009 guidance).

Amid persistent consumer headwinds, Brown Shoe (BWS) posted weaker-than-expected 1Q08 results Wednesday morning. Sales of $554M (a decrease of 2.1% y/y) fell short of expectations, and EPS of $0.05 (after adjusting for office relocation costs and insurance recoveries) missed the low-end of guidance by a few pennies. The stock is down a few percentage points midway through Wednesday's trading session.

Management painted a cautious picture for the rest of the year as well, citing a lack of catalysts to drive customer traffic, fewer wholesale reorders, and increased promotional activity. Full-year sales are now forecast to be in the range of $2.43-$2.48B (an increase of 3%-5% versus a year ago) with a comparable-store sales decline between -1% and -3%. The revised earnings per share outlook is $1.29-$1.53, but included $0.11 of office relocation costs and a $0.15 one-time benefit from insurance recoveries (suggesting an adjusted earnings range between $1.25-$1.49). In the Q&A segment of this morning's conference call, CFO Mark Hood indicated that the low-end of the revised guidance assumes that the consumer environment will remain as difficult as it has been, while the high-end implies a rebound in the consumer environment.

Monday morning, Ann Taylor (ANN) surprised the Street by increasing its 1Q08 outlook. Despite a total same-store sales decline of 4.3%, management raised its quarterly EPS forecast range from $0.35-$0.40 to $0.45-$0.47 (the previous consensus estimate was $0.36). Ann Taylor's LOFT stores, which cater to a more casual audience than the namesake brand, reported relatively strong comps of +0.7%, while Ann Taylor stores reported a comp decline of 11.5%. The announcement triggered a 26% surge in the stock, which remains in the mid-$28 range after Tuesday's close.

Honestly, we were shocked when we the saw this announcement because there have been so few reasons to invest in women's apparel retailers over the past 12 months. Though few men will admit it, the mature female consumer often represents the primary decisionmaker in a household. Confronted by a deteriorating economic situation with gas and food price inflation, housing market woes, and a tightening credit situation, she will likely be first member of the household to cut back on discretionary purchases. While some management teams attribute recent weakness to a lack of inspiring fashion trends, we believe this reason is the single biggest factor behind the sluggish traffic at Ann Taylor and its rivals over the past several quarters.

Collective Brands (NYSE: PSS) CEO Matt Rubel responded to last week's unfavorable federal court ruling in which the company was found guilty of trademark infringement and ordered to pay $305M in damages to adidas AG. In a letter to shareholders, Rubel discussed why he believes that the jury's ruling was "unjustified and excessive," and disclosed that the company will file motions asking the court to set aside the verdict, enter a judgment in its favor, order a new trial, or greatly reduce the jury's award.

• The total award of $305M (including $137M of Payless profits and $137M in punitive damages) is ten times the amount of actual damages found ($30.6M) and exceeds the profits that Payless ShoeSource made on its two- and four-stripe shoe styles by 15 times. Though our scope of patent and trademark infringement case is limited, we don't ever recall seeing a jury award of this magnitude.
• If the decision stands as ruled, it may also give adidas exclusive rights to all two- and four-stripe footwear designs. Payless is by no means the only footwear retailer with a private label that resembles adidas' three-stripe design (look around the footwear department at any mass merchant retailer). A ruling like this could potentially give adidas a monopoly on all striped shoe styles, which would have grave consequences across the industry as a whole.

Last week, Town Sports International (NASDAQ: CLUB) reported better-than-expected 1Q08 results and reaffirmed its full-year outlook, triggering a 26% surge in the share price on Friday. Though we were a bit surprised that management's commentary was as upbeat as it was (we cautioned about the possibility of negative statements regarding local markets in our earnings preview post last week), we remain bullish on Town Sports International's [TSI] long-term prospects as well as the fitness club space as a whole.