Back to school retail sales could face some challenges. From a top-line perspective, underlying demand drivers look soft and margins look pretty thin. That all adds up to continued trouble for consumers, retail stocks and the broader economy.
But don’t think this means it’s time to sell off everything and run for the bomb shelter. The most important fact to remember in a time like this is that we are investing in a market of stocks – not “the stock market.” There are always good companies doing well in the worst of times, and even in the heady days of a raging bull market there are losers that are bad for your bank account.
The indexes don’t matter. The specific stocks in your portfolio are what really count.
That’s why right now I’m focusing on a number of back-to-school retail stocks that may not seem like screaming buys amid weak consumer spending, but are great investments. The nature of their business, underlying fundamentals and chance for a seasonal surge on back-to-school sales make them ripe for the picking. Here are three of my favorites:
First up is Joe’s Jeans (NASDAQ: JOEZ). The company released Q2 earnings in July that were strong, especially considering the overall retail environment. The premium-priced clothing company reported a +51% surge in Q2 net sales, with sales up +42% in the wholesale segment and a stunning +180% in retail store sales thanks to aggressive expansion plans. The fact that Joe’s Jeans can post such top-line growth at a time like this is impressive. What’s more, JOEZ is building out new storefronts in the very profitable and high trafficked “discount premium” outlet malls, and launching new product lines to keep its growth going. In fact, JOEZ has opened their branded stores in premium outlets in Las Vegas, Seattle and Santa Monica – to name just a few of the eight locations opened since the beginning of the year. At about $2 a share right now, I’m targeting a price of $2.95, about a 50% gain in JOEZ stock. This could easily happen over the coming months if back-to-school sales build on recent successes – or if the $120 million company finds itself an acquisition target, which I think is very possible.
On almost the opposite end of the spectrum from a company selling $150 jeans is Dollar Tree (NASDAQ: DLTR). This discount retailer sells everything from cleaning products to snacks to home goods, and will be a cheap alternative for all those pencils and notebooks that students will need when they return to class. The frugal shopper has been flocking to Dollar Tree in recent months, pushing up the stock an impressive +45% in the last 52 weeks while the Dow Jones has only tallied a mere +8% gain. Growth appears to be in Dollar Tree’s future, too, after a Q2 earnings report on August 19 that showed revenue was up +37% thanks to continued improvement in same-store sales. DLTR has exceeded expectations for at least four consecutive quarters, and that shows staying power. What’s more, the retailer also boosted its own view for the year as a result.
Family Dollar has also delivered stellar gross margin expansion with the past several quarters delivering gross margins up more than 100 basis points. Although this past quarter saw a decline to just 37 basis points of gross margin expansion, fourth-quarter guidance is calling for continued positive margin momentum.
One of the most compelling reasons to buy Dollar Tree stock is the company’s ability to find growth in additional areas such as online merchandising. This area is where Dollar Tree sells in bulk to schools, offices and businesses — everything from vases for florists to wedding favors for party-planners to flash cards and Disney Princess workbooks for educators. I may not be a fan of retailers in general, but Dollar Tree is in a unique position to benefit from back to school sales and build on recent profits. Buy DLTR below $43.00.
A slightly more aggressive play for back-to-school investors is Children’s Place Retail Stores (NASDAQ: PLCE). While the company indeed posted a quarterly loss on Aug. 19 that was wider than last year’s, the longer-term potential of this stock is very good. Children’s Place operates nearly 600 retail locations selling clothes for infants to 10-year-olds, and has seen surprisingly good business during the economic downturn. Despite the recent report of a Q2 loss, the company said same-store sales were actually up +3.3% in the U.S. and online sales jumped +30%. What’s more, the company actually beat Wall Street expectations – and raised its full-year guidance as a result.
To top it off PLCE has authorized a $100 million share repurchase program, an encouraging sign for investors. Shares are up about +40% in the last 52 weeks, but have bounced around between $40 and $50 since April. Back-to-school success could be just what Children’s Place needs to break out and start another leg up. Buy this stock below $45.00
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