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3 Retail Stocks to Buy If They Stumble

Q3 earnings reports could put these picks on the bargain rack

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Nearly 20 retailers are reporting third-quarter earnings this week — just a few days removed from the biggest weekend of the most important quarter in retail. For bargain-hunters, the timing couldn’t be better.

A few stocks in particular stand out as potentially huge Q4 winners. And while I’d suggest them at their current prices, they could be bought on the cheap this week should Q3 earnings disappoint. Here are three to watch:


Wally Forbes interviewed Eric Heyman — co-manager of the Olstein Strategic Opportunities Fund (MUTF:OFSAX) — in October, and one of his top picks is Columbus, Ohio-based retailer Express (NYSE:EXPR).

Express was spun off from Golden Gate Capital and Limited Brands (NYSE:LTD) in May 2010 at $17 per share. After hitting an all-time high of $26.27 in April of this year, EXPR has been on a downhill slide ever since.

Chock it up to a couple of bad earnings reports, but the question is whether this trend will continue.

In early October, Express announced that its September revenues were extremely disappointing thanks to significantly reduced traffic at its stores. As a result, it lowered 2012 earnings from a range of $1.79 to $1.89 downward to $1.70 per share. In addition, EXPR expects same-store sales to be in the low single digits, which is less than its original estimate in the mid-single digits.

Whenever companies habitually revise earnings downward, you know they don’t quite have a handle on the business. I’d be very surprised if it didn’t issue another revision after reporting Q3 results before the market opens Wednesday. However, Jennifer Black & Associates reports Express did huge business on Black Friday thanks to its 50% off sale, so its earnings slide could very well come to an end in the fourth quarter.

Express operates more than 600 stores, and of that number, just 10 are in Canada. Focusing on the 20-to-30 crowd, I could see 50 north of the border. Long-term, I think its business will do just fine, and any drop on third-quarter earnings is an opportunity to buy EXPR at well below its IPO price.


The consensus estimate of 14 analysts for Guess‘ (NYSE:GES) third quarter (to be reported after the bell Wednesday) is 44 cents per share — 4 cents lower than it was three months ago. The estimate for all of 2012 is $2.17, 11 cents less than 90 days earlier.

Guess is a company in complete freefall. In early November, both its chief operating officer and chief financial officer left the company. It hasn’t increased same-store sales since Q3 2010. That’s seven consecutive quarters with decreasing same-store sales.

At the end of Q3 2010, Guess’ revenues were $614 million; 24 months later, they’re estimated to be $622 million — a gain of just 1.3%. That wouldn’t be so bad if earnings also were relatively flat over those two years, but that’s not the case. Instead, GES’ Q3 earnings are projected to be 41% lower than in 2010. I expect a miss of 1 or 2 cents because of obvious signs its business continues to deteriorate, which should knock the stock down to $22 … its lowest point since 2009.

So why would you buy Guess at all, let alone on weakness? In a word: licensing.

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