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5 Retail Sector Bargains to Buy Before 2013

Stocks in this article: COST BBBY LOW RL LTD

Like Costco, Ralph Lauren is in excellent financial shape. The firm's $266 million debt load is offset by more than $1.1 billion of cash and investments on its balance sheet, giving RL plenty of liquidity to handle any unforeseen hiccups in the economy. And with shares trading for a double-digit discount to the rest of the industry, there's also plenty of upside potential in this stock right now.

Lowe's Companies

Shareholders of home improvement retailer Lowe's Companies (LOW) are pretty happy in 2012 -- their stock has appreciated by more than 41% since the first trading day in January. Despite that rally in LOW, this stock is looking like a bargain compared to the rest of the sector: it trades for a 20% discount to P/E, a 37% discount to its cash flow multiple, and a 17% discount to its book value per share.

Lowe's is one half of the home improvement duopoly in the North America, with around 1,750 stores spread throughout the U.S., Canada, and Mexico. As housing has started reheating and homebuilders have rallied exceptionally hard, Lowe's has been able to pick up some of that momentum for itself. When sales growth languished during the Great Recession, Lowe's focused on internal efficiency, improving merchandising and distribution to squeeze bigger margins out of the revenues it was earning.

Until top rival Home Depot's (HD) "rip-off-the-bandage" approach to restructuring, Lowe's was far and away the better home improvement retailer operationally. Now, with Lowe's taking on its own restructuring plan (albeit a less desperate one), investors should expect similar operating metrics from this firm. Lowe's balance sheet is a little more conventional for a retailer: it carries a decent amount of leverage (used to build out stores), and a modest cash load. That said, cash easily covers debt obligations, and the firm still has access to dry powder if it needs it. The increased focus on store brands should keep boosting net margins for LOW in 2013.

Limited Brands

Limited Brands (LTD) is a staple in U.S. malls this holiday season. The firm owns a portfolio of popular retail store concepts that include Victoria's Secret, Bath & Body Works, and White Barn Candle Co., high margin stores that see considerable traffic.

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