Commerce Bancorp -- A Hot Retail Stock

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When it comes to growth retailers, there's

Gap

(GPS) - Get Report

,

Wal-Mart

(WMT) - Get Report

and

Commerce Bancorp

(CBH) - Get Report

.

Commerce Bancorp?

Sure. Just look at Cherry Hill, N.J.-based Commerce's second-quarter earnings report, in which it calls itself a "growth retailer" and discusses its "same-store core deposit growth."

OK, so Gap and Wal-Mart don't have core deposit growth, but otherwise Commerce and its retailing cousins have a lot more in common than you think. And that's by design.

Commerce's emphasis on acting more like a retailer and less like a bank has produced strong financial returns -- and as a result its stock price has shot up. Since the end of March, 43%.

For potential new investors, this obviously is a drawback. By the end of May it already had run up too much for

Beth Summers

, an analyst with Livingston, N.J.-based

Ryan Beck & Co.

. She dropped her rating to a hold from a buy. But Summers calls Commerce attractive on a long-term basis and says that she advises clients to accumulate on weakness. Ryan Beck hasn't participated in any recent Commerce underwriting projects.

Though tempered by the stock's rise, other analysts still see some short-term -- and even more long-term -- potential in Commerce.

Marni Pont

, an analyst with New York-based

Keefe Bruyette & Woods

, rates the stock "attractive" and calls Commerce a "terrific story." Keefe hasn't participated in any recent Commerce underwriting projects.

David Stumpf

, an analyst with St. Louis-based

A.G. Edwards & Sons

(which hasn't participated in any recent Commerce underwriting projects) agrees. He rates the stock "accumulate" with a price target of 43 a share. It's trading at nearly 40 a share. "Commerce has a very predictable, very successful growth pattern," says Stumpf.

Indeed, just look at Commerce's first six months, when it earned $19.5 million, or $1.14 a share, up 33% from the year-earlier's $14.7 million, or 93 cents a share. In addition, Commerce's return on equity, a key profitability measure, was 19.2% at the end of the second quarter, up from 16.9% a year ago. Banks generally shoot for ROEs above 15%.

"Commerce's earnings are top-line, revenue driven and are not dependent, like many banks, upon less sustainable sources of growth such as share buybacks, restructurings or reductions in reserve levels," Stumpf writes in a recent report. He expects Commerce's earnings per share to grow at an annual compounded rate of more than 13% in the three years ending in 1998, ahead of the 10% level by its peer group.

Commerce's retailing-like approach stems from its chairman,

Vernon Hill II

, who worked in site development for

McDonald's

(MCD) - Get Report

before starting Commerce in 1973. (Hill owns several Burger King restaurants today.)

His emphasis on retailing includes everything from branch design -- they all look alike -- to employee training -- there's a Commerce University, much like McDonald's Hamburger University. While many banks preselect management trainees, Commerce encourages tellers to become managers, notes Summers at Ryan Beck. After all, customers deal most often with tellers so why not have them happy and motivated, she says.

Commerce's approach is similar to that of

Norwest

(NOB)

, the Minneapolis bank that has had great success acting like a retailer. But while Norwest stresses cross selling -- pitching several products to existing customers -- Commerce aims to simply land more customers.

It does this by adding branches, which goes against conventional banking wisdom. Many banks today see branches as expendable and instead favor automated teller machines and telephone and personal-computer banking. Commerce, which now has 70 branches, is adding five more before the end of this year, a spokesman says.

Pont at Keefe Bruyette says Commerce, which bills itself as "America's Most Convenient Bank," was the first bank she encountered that actually invited her to see its branches. The branches feature extended hours -- until 8 p.m. on weekdays -- along with Saturday and Sunday hours.

Commerce uses its branches as deposit-gathering machines rather than as loan centers, so much of its inflow of funds goes into an investment portfolio, which produces a lower yield than a loan portfolio. But analysts say Commerce makes up for this lower yield with a cheap source of funds -- consumer deposits, which do not command high rates.

Commerce's strategy also produces steep expenses. Its efficiency ratio, a measure of how much it spends to gain $1 in revenue, was 65% in the year's first six months. A figure above 60% is considered high. Analysts say the higher expenses stem from its strategy of adding branches. But so far, that strategy has been a success.

As for takeover potential, you can barely say the word bank these days without raising that prospect. However, in this case, shareholders have plenty to be happy about and aren't likely to go looking for a buyer.