Sector Spotlight: Five Specialty Retailers to Pad the Pocketbook
Analysts have been touting retail stocks for much of 2001, chirping that lower interest rates, the prospect of a tax rebate and a hoped-for revival in consumer spending make investing in the nation's shopkeepers a good bet.
Yet investors who bought stalwart
Wal-Mart
(WMT) - Get Report
, the world's top retailer, have lost money this year, with shares off some 7%. And at
Home Depot
(HD) - Get Report
? Well, shares there are up only about 8% -- better than the broader market, but hardly exceptional.
But tucked in the shadows of these major retail names are a slew of smaller stocks, with market values of about $1 billion or less, that have made savvy investors a bundle of money this year. And some of these companies, say analysts, are poised for further moves, spurred by favorable fashion trends, easy sales comparisons and lower taxes.
Women's Wear Works
Take
bebe stores
(BEBE)
, a women's apparel and accessories chain based in Brisbane, Calif. Its shares, which recently traded at $30.14, are up about 47% this year. bebe is at the top of many analysts' list of small-cap favorites, including Himali Kothari, retail analyst for the $2.3 billion
(TAEMX)
John Hancock Small Cap Growth fund, which owns shares in the company. "It is really a turnaround story," she says. "It has new management and the easiest
sales comparisons in the second half of the year."
The company saw same-store sales, which gauge activity in shops open at least a year, rise 7.9% in May, well above the 3% most analysts expected. The showing drew investors' attention, coming as it did at a time when most major retailers were
undershooting expectations. And its store redesigns and recent merchandise assortments -- which have been heavy on denim -- have analysts praising the company.
The stock is on
Robertson Stephens
analyst Janet Kloppenburg's list of best ideas in the sector, alongside more familiar names such as
Ann Taylor
(ANN)
,
Gap
(GPS) - Get Report
,
Abercrombie & Fitch
(ANF) - Get Report
and
Tommy Hilfiger
( TOM).
"We continue to believe bebe currently offers one of the most exciting, fashion-forward and appealing merchandise assortments in the mall," wrote Kloppenburg in a recent report assessing the industry. "We believe the company's new merchandise assortments broaden the bebe brand's appeal and should help to build the brand into a more diverse, versatile life-style label." (Kloppenburg has a buy rating on the stock, and her firm has done underwriting for the company.)
Indeed, many of the best-performing small-cap retail stocks fall into the same sector as bebe: specialty apparel retailers with a decidedly female bent. While the men's apparel business has been
weak across the board, the women's business has done well.
Chico's
(CHS) - Get Report
, based in Fort Myers, Fla., is up 58% on the year on the back of impressive comparable-store sales gains. Elizabeth Pierce, an analyst at
Wedbush Morgan Securities
, expects the shares, which recently traded at $31.78, to reach $44 within 12 months. (She has a strong buy on the stock, and her company hasn't done underwriting for Chico's.)
Seal of Approval
Another of Pierce's favorites is
Wet Seal
( WTSLA), a funky clothier based in Burbank, Calif. She has a strong buy rating on the stock and a $55 price target. She says the company is well-positioned for a strong back-to-school season, a pivotal period for most retailers. But much of her bullishness stems from improvements in the company's merchandise that have reduced markdowns, boosting margins. In the first quarter, for example, gross margins increased to 30.2% from 25.8% in the year-ago period, a trend she expects to continue. (Her firm doesn't have an investment banking relationship with the company.)
Shares recently traded at $33.65 and are up around 68% on the year.
Want some more names? Try shoemaker
Skechers
(SKX) - Get Report
, whose slip-on athletic shoes are immensely popular and whose shares have nearly doubled this year. Analysts see no end to the popularity of its shoes, and even after the run-up, shares still trade at a discount to its projected growth rate. Based on 2002 earnings estimates, shares trade at a relatively cheap 13.6 times earnings, less than the 17% annual earnings growth analysts project. Another name is the popular
Too
(TOO) - Get Report
, which caters to young girls with its Limited Too brand and has seen its shares rise 85% this year.
Both of these names are owned by Kothari's fund and are worth considering for any portfolio.