S&P 500 profits are forecast to grow just 5% versus last year’s fourth quarter. As recently as Sept. 30, analysts were predicting a gain of more than 9.3%. But that lackluster earnings growth doesn’t extend to some of the biggest names at your local mall.
Thanks in part to some easy comparisons, the apparel retail sub-sector of the S&P 500 is projected to enjoy a 28% year-over-year increase in fourth-quarter earnings, according to data from FactSet. Indeed, four of the biggest specialty apparel retail chains are forecast to post double-digit percent earnings growth:
Urban Outfitters (NASDAQ:URBN) +92%
Abercrombie & Fitch (NYSE:ANF) +69%
Gap (NYSE:GPS) +55%
Limited Brands (NYSE:LTD) +17%
Naturally, that doesn’t make these stocks automatic buys. The market is forward looking, meaning it’s already trying to price in any benefit from future earnings growth. And, in many cases, these stocks have gone vertical of late, meaning they may have gotten ahead of themselves, or at least the easy money has already been made.
Urban Outfitters, for example, has shot up about 8% since mid-November, despite an earnings miss. Heck, the stock’s up about 37% for the year-to-date, beating the S&P 500 by about 25 percentage points.
That has shares looking pretty fairly valued, even with earnings expected nearly to double in the current quarter. URBN’s forward price-to-earnings ratio (P/E) is essentially even with its own five-year average, according to data from Thomson Reuters Stock Reports.
Abercrombie & Fitch went vertical on Nov. 14, jumping 30% after the company reported its first quarter of year-over-year profit growth in a year. The beleaguered retailer also upped its earnings outlook.
Shares are still off about 9% for the year-to-date, however, and if the turnaround is real — and both the market and management’s forecasts are correct — the valuation does look compelling. The stock currently trades at a 23% discount to its own five-year average.
Gap’s another long-suffering retailer that seems to be sorting itself out. Profit, sales and margins all improved in the most recent quarter. The company also raised its outlook.
The market was well ahead of the news, however: shares are up nearly 90% for the year-to-date. That has the stock trading at a significant premium to its own five-year average on a forward earnings basis.
Limited, for its part, beat Street estimates for the most recent quarter even as profit declined against a year-ago tax benefit. Perhaps more important, same-store sales, a key measure of a retailer’s health, rose 5%. In other good news, the company upped its share buyback program.
But Limited has gained 20% for the year-to-date, making shares appear to be fairly valued. The stock trades essentially in line with its own five-year average on a forward earnings basis.
The only obvious “bargain” in the group would appear to be ANF. But then sometimes stocks are cheap for a reason. In this case, the market will probably need more evidence that the retailer’s turnaround is sustainable before pushing up the multiple.
Based on valuation alone, if you can accept the risk, then ANF is a buy at current levels. URBN, GPS and LTD look like holds.
As of this writing, Dan Burrows did not hold positions in any of the aforementioned securities.