3 Retail Stocks to Buy If They Stumble

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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:

Express 

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.

Guess

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.

Despite its recent woes, the Guess name still means something. In the first two quarters of 2012, its operating profit from licensing was $47.4 million on $56 million in revenue for an operating margin of 85% — 400 basis points worse than in 2011. Historically, its operating margin for licensing in the first six months of the year has been anywhere between 82% and 89%.

Unless something happens to affect its level of licensing revenue, which is unlikely, it’s very hard for Guess to actually lose money on an operating basis, putting an effective floor price on its stock.

The closer GES moves to $20, the more attractive it becomes.

Zumiez

Action sports apparel and footwear retailer Zumiez (NASDAQ:ZUMZ) has had a topsy-turvy ride the past five years. Up and down like a yo-yo, its stock has lost 37% in the past three months and is down 29% through Nov. 26.

Much of the damage came on Oct. 31 when it revised its third-quarter earnings from a low of 42 cents down to 39 cents because of weak European revenues from Blue Tomato, its $75 million acquisition. Zumiez intends to use it as a stepping stone into the European market, which currently is suffering great economic upheaval. Since the company’s revision at the end of October, analysts have revised its Q4 earnings downward by 5 cents to 71 cents per share.

Several years ago, Zumiez had the opportunity to bid on Canadian action sports apparel and footwear retailer West 49, a company whose shares I owned. Zumiez contemplated topping the bid by Billabong (PINK:BLLAY) so it could quickly gain a national presence; however, it ultimately passed on West 49, opting to open its own stores one at a time. It was a wise choice. Billabong overpaid for the Canadian retailer, partly contributing to the Australian company’s demise in the past 24 months.

Once Zumiez gets its Austrian acquisition under control (Europe also has to come back), I see ZUMZ retesting $41.72, which it hit on June 20. In the meantime, any uncertainty in its third- and fourth-quarter reports will likely knock it down some more. First up is Q3 earnings, which Zumiez will report Thursday after the bell.

Still, the last time ZUMZ was this low for any extended period of time was for five months in 2010, its enterprise value is currently 6 times EBITDA, it has $3 per share in cash and virtually no debt.

Zumiez can’t get much cheaper than it already is.

As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.


Article printed from InvestorPlace Media, https://investorplace.com/2012/11/3-retail-stocks-to-buy-if-they-stumble-expr-ges-zumz/.

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