10 Top Retail Stocks of 2010

NEW YORK (TheStreet) -- Retail had a comeback year in 2010.

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So far, retail sales have gained 4.4% for the year, says Craig Johnson, president of Customer Growth Partners. With Christmas on pace to be the biggest in three years, Johnson predicts sales could end the year up 4.6%, only a percentage point away from the historical average.

Retail stocks have steadily improved throughout 2010, with many taking off after releasing impressive third-quarter earnings reports.

While the retail recovery hit a speed bump mid-year when it was believed the economy was headed for a double dip, the sector still saw substantial gains, with the S&P Retail Index increasing 24% to 509.17 for the year-to-date period.

TheStreet used I-Metrix to calculate which retail stocks saw the biggest percentage gains in 2010. The top 10 stocks stretch across the industry, from dollar store chains to luxury department stores.

The question is, will this year's winners be able to carry the momentum into 2011? Here's a look at the top retail stock gainers of 2010.

10. Foot Locker

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Foot Locker ( FL) took big strides in 2010, with a resurgence in demand for athletic and running merchandise.

Overall, shares of Foot Locker have advanced more than 70% during the year, recently hitting a multi-year high after reporting a nearly double third-quarter profit.

During the three-month period the company earned $52 million, or 33 cents per share, compared with $16 million, or 10 cents, in the year-ago period. Analysts were forecasting a much smaller profit of 17 cents. Revenue rose 5.4% to $1.28 billion, while same-store sales increased 8.1%. Gross margin improved more than 300 basis points to 30.3%.

Foot Locker has reduced promotions, which has helped lift revenue. It is also benefitting from lower lease costs in U.S. malls.

The company is returning value to its shareholders, repurchasing $16.2 million of common stock during the third quarter. For the full year, it has bought back 2.5 million shares for $35.9 million.

Foot Locker has $541 million in cash and short-term investments and just $137 million in debt.

9. Saks

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Saks ( SKS) has made a remarkable recovery since the depths of the recession, as the luxury shopper leads the consumer recovery.

As a result, the upscale department store is predicting fourth-quarter sales will grow in the mid-single-digit range.

In its third quarter, Saks earned $36.3 million, or 20 cents per share, compared with $6.3 million, or 4 cents, in the year-ago period. Excluding items, earnings actually hit 6 cents, better than the 3 cents analysts predicted. Sales grew 4.3% to $658.8 million, while same-store sales shot up 5.7%. Gross margin widened to 42.6% from 40.3% from more full-price selling.

Saks, which aggressively promoted in 2009, reduced discounting by about 30% in the first-half of the year, CEO Steve Sadove told TheStreet last month.

Improved sales trends led Standard & Poor's to consider upping Saks' credit rating if it performs well in the fourth quarter. In order to see a lift to its rating, Saks would have to report a mid-single-digit percentage increase in its sales comparisons and profit margins at or above 10%, the firm said.

Saks' recovery has caught the attention of investors, with shares rallying more than 75% so far this year. And in October, Italian businessman Diego Della Valle raised his stake in Saks to 19% -- a move that prompted yet another flurry of takeover speculation. Sadove declined to comment on the rumors.

Despite this notable turnaround, Sadove warns that investors shouldn't get euphoric just yet. "There are a lot of clouds on the horizon, the economy is still fragile," he said. "The high-end consumer is very much tied to how they feel about their net worth, and that means how is the stock market doing. So there is a very high correlation between the markets and our consumer. Right now we are feeling OK. A Dow at 11,000 plus is a lot better than when it was at 6,500, but it's not the same as when it was at 14,000 either."

8. Dollar Tree

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Dollar Tree's ( DLTR) stock gained more than 75% in 2010 as shoppers flocked to discounters amid the recession to save a buck.

In its most recent quarter, the discounter earned $93.2 million, or 73 cents per share, a 43% jump from $68.2 million, or 51 cents, in the year prior. Sales grew 14.4% to $1.43 billion from $1.25 billion, while same-store sales climbed 8.7%.

Food, housewares and health and beauty were some of the best performing categories of the quarter, Dollar Tree noted.

The company also beefed up its balance sheet, with $392 million in cash at the end of the third quarter from $342 million in the year prior.

Dollar Tree now foresees full-year earnings in the range of $3.01 to $3.08 per share, on sales of $5.88 billion to $5.92 billion. It previously forecast 2010 profit of $2.97 a share.

International growth will be a primary focus in 2011, as Dollar Tree moves into Canada with the purchase of 86 Dollar Giant stores.

7. Whole Foods Market

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Whole Foods Market's ( WFMI) stock grew more than 77% in 2010, as cost cuts and the return of high-income shoppers boosted its bottom line.

Management is confident in its financial position and outlook, last week announcing that it is reinstating its quarterly dividend after more than two years. The board approved a quarterly cash dividend of 10 cents per share, payable on Jan. 20 to shareholders of record as of Jan. 10.

Whole Foods' stock has steadily been gaining steam since it bottomed in March 2009, hitting a high in November after reporting better-than-expected earnings.

During the quarter Whole Foods earned $57.5 million, or 33 cents per share, surpassing consensus estimates of 28 cents. Revenue grew 15% to $2.1 billion, while same-store sales jumped 8.7%.

The strong performance prompted management to up its 2011 forecast, now expecting earnings in the range of $1.66 to $1.71 per share, from prior guidance of $1.59 to $1.64. Analysts are predicting a profit of $1.62 per share.

Looking ahead, Whole Foods plans to open three new stores in the fourth quarter, bringing its total to 302 locations.

Whole Foods cut its debt by 31% during the period to $514 million. It currently has about $223 million in cash and cash equivalents on its balance sheet.

6. Family Dollar Stores

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Family Dollar Stores ( FDO) stepped up its game in 2010, and investors took notice, sending shares up more than 80% in 2010.

During the year the discounter remodeled about 800 stores, increased advertising and extended its hours to improve the shopping experience.

In fiscal 2010, Family Dollar earned $358.1 million, or $2.62 per share, on revenue of $7.9 billion.

In October, Family Dollar made an accelerated share repurchase agreement with Wells Fargo to pay $250 million for an equivalent number of shares. As a result of this deal, the company upped its 2011 forecast, now expecting earnings in the range of $3.04 to $3.24 per share, from prior outlook of $2.95 to $3.15 a share.

Stock buybacks reduce the number of shares outstanding, and thus, increase the percentage size of shareholders' stakes and lift earnings per share.

In comparison to rival Dollar General ( DG), Family Dollar still has significant growth opportunities. With about 6,800 stores, its fleet is substantially smaller than Dollar General's portfolio of nearly 9,000 locations. Family Dollar plans on opening 300 stores during the year, an approximately 50% increase from last year.

But there is still the looming fear that as the economy continues to rebound, Family Dollar will lose some of the shoppers it gained amid the economic downturn. There's also the concern that Wal-Mart's ( WMT)turnaround will put a damper on Family Dollar's success.

Family Dollar, no doubt, picked up some disheartened consumers from Wal-Mart, who struggled this year following several failed initiatives. Through its "Project Impact," Wal-Mart removed hundreds of products from shelves it deemed unprofitable, instituted temporary rollbacks, and discontinued "Action Alley," wide aisles filled with discounted merchandise.

As Wal-Mart works to correct these mistakes and return to its focus of everyday low prices, its competitive threat to the dollar stores may increase. The No. 1 retailer is also looking to roll out smaller format stores, which would also closely challenge the dollar chain business model.

5. PriceSmart

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PriceSmart ( PSMT) might not have the same cache as other warehouse clubs like Costco Wholesale ( COST)or BJ's Wholesale ( BJ), but it could be the undiscovered winner of 2011.

PriceSmart, which operates 28 clubs in Central America and the Caribbean, has seen shares grow 86% for the year on robust sales and expansion potential.

In November, same-store sales spiked 15.8%. The company also said it acquired 210,000 square feet of land in Barranquilla, Colombia, to build a new club, which is expected to open in the summer of 2011.

"What I like about PriceSmart is the potential for growth outside our borders. With jobs leaving this country and many heading south of the border, Latin America holds promise," wrote Jamie Dlugosch, editor of Penny Stock Winners, earlier in the month. "This smaller company with a market capitalization of less than a billion deserves some consideration from investors."

It is also highly likely that other companies in the industry are looking at PriceSmart as a possible takeover candidate, Dlugosch noted. Earlier this year, Wal-Mart ( WMT) took a majority stake in South African retailer Massmart, showing growing interest in foreign operators.

4. Dillard's

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Dillard's ( DDS) stock has been on a rampage since its surprising October same-store sales report. For the year, shares have gained more than 90%, significantly higher than department store rivals.

In comparison, Macy's ( M) stock advanced about 50% in 2010 and J.C. Penney ( JCP) increased about 27%.

The department store sector took one of the biggest hits in 2007 and 2008. During that time, Dillard's missed estimates every quarter, and shares hit a low of $2.78 per share. But the company started to regain momentum in 2009.

In its third-quarter of 2010, profit soared 80% to $14.4 million, or 22 cents per share. Revenue dipped 1% to $1.37 billion, and gross margin rose 1.5 percentage point.

Dillard's has reduced expenses by cutting advertising and lowering inventory levels. In the third quarter selling, administrative and general expenses declined to $398.5 million from $402.1 million. Inventory fell 2%.

Dillard's operates about 300 namesake stores and 14 clearance outlets in 29 states, as well as an e-commerce site.

3. AnnTaylor Stores

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AnnTaylor Stores ( ANN) is one of the few true turnaround stories in the retail sector.

The women's apparel retailer embarked on a major restructuring in January 2008. Since then it has shuttered about 145 underperforming stores, tightly managed expenses and inventory, and revamped its merchandise, creating an extremely lean business model.

Recently AnnTaylor also began to remodel stores and reduce its footprint, increasing overall productivity.

In its third quarter, profit surged from $24.2 million, or 41 cents per share, from $2.1 million, or 3 cents, in the year-ago period. This led the company to up its guidance, expecting sales to approach $500 million in the fourth quarter, with a mid-to-high single digit percentage increase in same-store sales this holiday.

As a result of improved store productivity, AnnTaylor decided to keep open about a dozen stores that it intended to shutter.

In 2011, developing its outlet business will be a dominant focus. AnnTaylor acquired 40 Liz Claiborne ( LIZ) outlet stores earlier this year, and plans to open 35 Loft and 5 namesake factory stores in the second quarter of the year.

In general, outlets carry significantly higher volumes and margins, which make this strategy a clear positive, J.P. Morgan analyst Brian Tunick wrote in a note. This accelerated growth is expected to contribute $75 million on incremental sales in 2011.

The company will also be launching a new e-commerce platform that will allow for simpler and quicker checkouts. It will also roll out international shipping, and add mobile features.

AnnTaylor's only real soft spot is its Loft division, where shoppers are still tightening their wallet and focusing on promotions. "We believe that the company is now in its elements, and with a few minor adjustments at Loft, this should fuel this company's momentum into 2011 and beyond," analyst Jennifer Black, of the firm bearing her name, wrote in a note.

2. Pier 1 Imports

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Pier 1 Imports' ( PIR) recovery in 2010 is especially noteworthy, given that its troubles began before the U.S. entered the recession.

The home goods retailer reported its fourth consecutive profitable quarter at the end of the summer, following three years of losses from 2006 through 2009.

As Pier 1 exits this tumultuous period, the top line is improving. The company prereported that same-store sales in the third quarter grew 10.2%, better than the 8% to 10% gain it previously forecast. It is scheduled to release its full earnings results on Dec. 16.

Pier 1 has reinvigorated traffic at its stores through merchandise improvements and a more effective use of targeted promotions. Fewer markdowns signal more controlled inventory levels, which could lift gross margin.

In an effort to cut costs, the company has also shuttered stores, negotiated lower rents and reduced its workforce.

While sales are still below peak levels, Oppenheimer analyst Brian Nagel said in a note in October that sales will continue to rebound over the next several quarters.

Investors may even see some returns, as Nagel predicts the company will return excess cash to shareholders as it lowers its debt to $9.5 million and improves its cash position, with $187.6 million on its balance sheet.

1. Zumiez

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Skate and surf-inspired retailer Zumiez ( ZUMZ) is the biggest stock winner of 2010, surprising investors with its robust sales and growth prospects.

In its third quarter, Zumiez reported a 143% surge in profit to $12.3 million, or 40 cents per share, making it the highest third-quarter profit since the company opened its first store in Seattle in 1978. Revenue rose 20% to $135.9 million during the period, while same-store sales shot up 14.4%.

After upping its outlook several times throughout the year, Zumiez expects fourth-quarter profit between 43 cents and 47 cents per share, with same-store sales gaining in the low double digits to mid-teens. Analysts forecast a fourth-quarter profit of 41 cents a share.

A majority of Zumiez's success can be credited to a rebound in full-priced selling and minimal promotions. Its mix of third-party brands has made it a go-to destination in the niche. "We believe that as competitors such as Pacific Sunwear of California ( PSUN) shift their merchandising strategy to target an older age group, Zumiez may well find itself the recipient of incremental share," Janney Capital Markets analyst Adrienne Tennant wrote in a note following Zumiez's third-quarter earnings report.

In 2011, Zumiez will continue to benefit from the resurgence of the surf/action-sports lifestyle trends, with upcoming surf-themed films and an increase in skate-related media, Tennant noted.

"The company has been able to navigate through this economic downturn because it has remained true to its culture and has provided the customer with both a unique offering and incredible customer service," Black wrote in a note.

Aside from turning solid earnings results, Zumiez is one of the few growth stories left in specialty retail. The company opened 27 stores in 2010 and will end the year with a fleet of 400. Heading into 2011 and beyond, management is planning for new store growth between 8% and 10% annually, targeting a total of 600 to 700 locations.

Its e-commerce business is also becoming a viable growth vehicle, with online sales up 165% in the third quarter.

Zumiez plans to make its first international foray in 2011, looking to open a handful of stores in Canada. "We believe Canada should be successful for the company because of their position as an action-sports retailer, especially in the snow arena," Black noted.

With about $100 million in cash and no debt, an acquisition could also be on the table if the right opportunity arises, Black says.

Zumiez shares have run up more than 140% for the year-to-date period. While Tennant predicts the stock could take a "breather" in the near-term, she says the growth story is on track and the stock will continue to appreciate in 2011.

-- Written by Jeanine Poggi in New York.

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