3 Retail Stocks That Can Bounce Off the Ropes

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Retail stocks have battled ferocious headwinds in the first half of 2014 — depressed further by big earnings misses from some of the biggest names like Walmart (WMT), Target (TGT), Macy’s (M).

arrowsBut while bad news has hammered retail stocks across the sector, don’t overlook potential bargains that are poised for a comeback.

Most retail stocks have slogged through a disappointing year so far as rosier employment numbers, and the end of an unusually cold winter failed to spark sales gains. Perhaps more puzzling, sluggish sales dogged chains across the retail spectrum: high-end, low-end, department stores, boutique and specialty shops.

Even during the Great Recession, low-to-middle income shoppers became more price conscious and selective — lifting stocks like Dollar Tree (DLTR) and Dollar General (DG). Meanwhile, well-off consumers kept high-end retailers like Saks (SKS) and Tiffany (TIF) in business. Now, however, there’s more than enough pain to go around, as InvestorPlace Editor Jeff Reeves has explained.

Although retail stocks have looked bearish lately, growth investors can catch a bargain if they’re willing to do some bottom-fishing in the retail stock pond. Bottom-fishing is a bet that a bean-down stock will bounce back and deliver strong returns.

For investors with a higher tolerance for risk, here are three retail stocks that are down, but not out:

Express Inc. (EXPR)

express-expr-stockExpress Inc. (EXPR) boasts some 630 retail and factory outlet stores located across the U.S., Puerto Rico and in Canada. More than most retail stocks, the chain caters to Millennials — women and men aged 20-30 — with clothing and accessories. The company has an e-commerce site and franchise stores in the Middle East and Latin America.

Weak earnings and declines in same-store sales and traffic drove EXPR stock to lose a third of its value from January through May 30. In June, however, Stefan Kaluzny’s Sycamore Partners revealed it had purchased a stake of nearly 10% in EXPR, and that it was pursuing a buyout. Kaluzny is no stranger to retail: He spent time on the boards of Express and Zale’s (ZLC), and Sycamore has pumped cash into struggling brands like Aeropostale (ARO), Stuart Weitzman and Coldwater Creek.

The stock soared in anticipation and has gained 15% in the past couple of months. Investors may also be cheering President David Kornberg, who will be taking over as Chairman and CEO in January. EXPR has a price-to-earnings-growth (PEG) ratio of less than 1, indicating that the stock is undervalued. Kaluzny’s experience and cash combined with EXPR stock’s forward P/E of 14, makes EXPR look like a bargain among retail stocks now.

Coach (COH)

Coach NYSE:COHIt seems strange that Coach (COH) has faced tough challenges this year. The 73-year-old upscale handbag and accessories brand that survived the Great Recession and even launched a new cheaper chic line to profit from it. But COH is down more than 33% year-to-date, and many investors in retail stocks left the iconic brand for dead — until the company’s fourth-quarter earnings release this month.

Make no mistake, the quarter was ugly: Same-store sales in North America fell 17% compared to the year-ago quarter, net sales fell year-over-year from $1.22 billion to $1.14 billion. But COH did manage earnings of 59 cents per share — beating Wall Street’s expectations by six cents.

There were a few other bright spots in the report: Strong sales in luxury-conscious China, impressive results from its men’s collection and an extreme makeover for its North American market. COH has done a great job of cracking the code in China’s upscale urban consumer niche with so-called “accessible luxury” handbags that sell for less than $400, edging out status European brands with more fashion-forward styles.

U.S. retailers have asked the question: “Can you market a $500 bag or backpack to men?” Coach has answered the question with a resounding “yes” — COH’s Men’s Collection brought in a cool $700 million last year and are poised to keep running strong. COH is revamping its North American operations — with plans to close up to 20% of its stores and return to its classic roots with an eye toward lifting margins.

Coach’s strategy is sound, as its management and marketing savvy. With a forward P/E of 18, the stock’s valuation is a little higher than some retail stocks, but the growth prospects – particularly in China – and the current dividend yield of 3.6% make COH a solid bet now.

Ann Inc. (ANN)

annincAnn Inc. (ANN) is the parent of classic women’s apparel chain Ann Taylor and Loft, its more casual, “upper moderate” brand. Shares of ANN, the parent of Ann Taylor and Loft stores, are down 2% so far this year but it has been a wild and volatile ride for shareholders.

ANN reported fiscal second quarter earnings of 70 cents per share on Friday and actually beat the Street by two cents. ANN’s $648.7 million in sales missed analysts’ expectations of $650 million as same-store sales declined by 2.3%. Loft was the clear culprit in the decline — its 4.1% same-store sales decline wiped out a scant gain at Ann Taylor stores. As a result, ANN now expects full-year sales of $2.56 billion, down from earlier expectations of $2.6 billion.

There’s very little good news in those numbers and ample reason for investors to bail out … except for one thing: ANN stock surged 6% on Monday after news broke that activist investor Engine Capital and Red Alder hedge fund urged a sale of the 1,040-store chain. The letter said ANN shares are deeply undervalued at present and could be worth $50 to $55 per share in a buyout. That’s a huge premium for a stock that has been bouncing around and below $40.

In response, ANN issued the following statement via PR Newswire:

“ANN Inc. welcomes open communications with its shareholders and values constructive input toward the goal of enhancing shareholder value. Our Board and management team are committed to creating value for all ANN Inc. shareholders, and we will continue to take actions to accomplish this goal and position the Company for growth and success.”

I think ANN’s management has received the message loud and clear. They also know that the Ann Taylor brand continues to benefit from a loyal base of upscale customers. However, sales and margins continue to struggle at lower-priced Loft Outlet and Ann Taylor Factory stores. The risks are higher with ANN stock than they are for retail stocks like COH or EXPR, but ANN could be worth a hefty premium if a sale does go through.

As of this writing, Susan J. Aluise did not hold a position in any of the aforementioned securities.  


Article printed from InvestorPlace Media, https://investorplace.com/2014/08/retail-stocks-expr-coh/.

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