While many retailers hope to provide a happy holiday to investors, it isn't clear that

Goody's Family Clothing

(GDYS)

can deliver the goods for investors.

This Knoxville, Tenn., retailer of moderately priced family clothing has 300-plus stores across the Sunbelt and has fought to control costs as the economy softened. Yet, with continuing economic prospects uncertain and fierce competition from the likes of

Kohl's

(KSS) - Get Report

,

Target

(TGT) - Get Report

and

J.C. Penney

(JCP) - Get Report

, as well as

Gap's

(GAP)

Old Navy brand, it isn't clear there is a profitable spot for a retailer that seems to be lacking a niche.

Yes, Goody's is a well-known name among consumers in Tennessee, Georgia and other parts South. But like the now-defunct Uptons, the competition appears to be passing Goody's in scale and operating efficiency.

To its credit, Goody's has taken positive steps to cut costs and restructure, replacing several merchandising executives. It has remerchandised stores, replacing low-margin lines such as luggage, soft home goods and gifts with higher-margin items like plus and petite sizes, children's, intimate apparel and bed and bath items, and added name brands in several instances. And, Goody's has brightened its floor plans, adding open space and removing clutter.

Those moves to make the stores more consumer-friendly and improve sales per square foot have one analyst excited. "We believe the now virtually completed restructuring initiatives will result in improving fundamentals beginning in mid-2002," Dennis Van Zelfden, a retail analyst with SunTrust Robinson Humphrey, told clients Monday. He rates the stock buy and personally owns it. His firm has provided banking services for the company.

A Lump of Kohl's

While the restructuring may provide support for Goody's stock, anecdotal evidence suggests it will take a lot more to make this stock a winner in the new, competitive retail environment in the South.

Enter Kohl's, whose 15-plus new stores in Atlanta have taken the wind out of Goody's sales and which is threatening to compete head-to-head with Goody's in all of its major markets. Given Kohl's aggressive pricing and national purchasing strategy, it will be very hard for Goody's to gain ground in its markets, restructuring or not.

Then there's increasing competition form the likes of Target, J.C. Penney and others. While not scientific by any means, visits to Goody's, Kohl's and Target over the Thanksgiving Day weekend clearly showed the impact of Kohl's arrival in Atlanta on Goody's traffic. And, without traffic, you can't move inventory.

It's the Economy, Goody's

Goody's other problem is a stubborn economy. While restructuring can help the retailer improve margins -- Van Zelfden believes Goody's net margin will increase to 1.5% in fiscal year 2002 from 0.7% in 2001 -- a continued economic slowdown will put pressure on second-tier retailers. And, while national retailers have the benefit of geography to cushion regional economic blows, a protracted slowdown in the Sunbelt could blunt the impact of Goody's restructuring efforts.

There is no question, Goody's appears cheap, trading at only 8.4 times next year's earnings estimates, a multiple Van Zelfden believes is low for the average apparel retailer. "We believe that during the next six months, increasing evidence of an economic rebound around mid-2002 will begin to appear, hopefully increasing valuations in the apparel group to a more reasonable level of 13 times to 15 times forward estimates," he notes. "Once the economy turns and individual company fundamentals improve, we believe valuations could get back to more normal levels of 16 times to 18 times forward estimates."

While those multiples may seem plausible for some retailers, they seem optimistic for a company such as Goody's, which will be lucky to grow earnings at a midteens clip over the next five years. Given the looming threat of Kohl's and the economic environment, the company's current forward multiple seems reasonable.

I don't want to be a complete Grinch; I am impressed with the company's restructuring initiatives. Yet, without a real niche as a weapon, the small retailer always finds it hard to do battle with the new bully on the block. And, while Goody's isn't likely to face the same fate as Uptons, there are better options for retail investors. Goody's gets a half-barrel.

For an explanation of our barrel rating system, see our recent description.

Counting Change

This weekly review of previous Bottom of the Barrel picks looks at the Nov. 7 pick,

Coinstar

(CSTR) - Get Report

, the national operator of self-service coin-counting machines.

In response to positive projections for 2002 and 2003 revenue and earnings, Coinstar stock put a jingle in investors' pockets, gaining nearly 20% in the past week. While the long-term prospects of the company still look good, Coinstar's recent gains provide plenty of coins to count. There is nothing wrong with a little profit-taking in this case.

Witness Systems'

(WITS)

58% gain since the stock was profiled here on Oct. 31 also provides nice profits. While we firmly believe in the long-term future of this stock, the gains should not be ignored.

Our biggest disappointment remains

Hibbett Sporting Goods

(HIBB) - Get Report

, which is back in the double-digit doghouse. While we always liked this stock better in the mid-20s, below-par third-quarter earnings combined with a cloudy fourth-quarter outlook and the registration of 1 million shares by a major shareholder have clearly weighed on the stock. Still, Hibbett remains an intriguing and now inexpensive play on the economic recovery of Main Street.

Check back here for continued reviews on the stocks profiled in Bottom of the Barrel.

Do you have candidates for Bottom of the Barrel? If so, shoot me an email with the company name, why you think it qualifies and your full name and hometown. If we profile your suggestion, we'll send you a TSC gift to commemorate your pick.

Christopher S. Edmonds is president of Resource Dynamics, a private financial consulting firm based in Atlanta. At time of publication, neither Edmonds nor his firm held positions in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While Edmonds cannot provide investment advice or recommendations, he welcomes your feedback and invites you to send it to

Chris Edmonds.