A Retailing Twofer
I'm sure you've about had it with retailers at this point in the holiday season. But maybe there's a way you can get paid back a little something for doing your penance at the mall: Pick up a retailing stock or two while they're still a bargain. Clothing retailers have been lagging the market this year, but 2007 looks promising, says UBS Securities, as consumers continue to prove willing to part with their cash -- at least at the right stores. The winning chains are the ones that make the right fashion calls, have the technology to fine-tune inventory and generate the cash flow to keep growing.
Trouble is, the holiday shopping season is still a wild card for just about everyone. Unseasonably warm weather, recalcitrant shoppers and last-minute markdowns could make the end of '06 and the first few months of '07 a little bumpy for retailers -- which makes the best among them pretty good bargains now, at least for gutsy investors. We've got a couple retail stocks that, between them, cut a wide swath in demographics as well as in fashion.
UBS designates its top pick going into 2007 as, Abercrombie Fitch, the fashion leader among the high school set. The stock (symbol ANF) jumped 2.5%, to $69.97, on December 19 after UBS upgraded it from neutral to buy. Not everyone's a fan, however: Friedman Billings Ramsey pointed to disappointing November sales in a recent report and said it "chooses to remain on the sidelines." The stock, it said, would do as about as well as the market but no better. And even UBS analysts Meredith Love Kent and Nicole Shevins are lowering their earnings estimate for the quarter that ends late in January by a nickel a share, to $2.14. Their bullish call might be a month or two early, they concede, but they recommend that investors buy the stock on any weakness.
A recent meeting with Abercrombie execs has convinced the analysts that the company is on the right track. In particular, shareholders will be rewarded by the company's efforts in inventory management, cost controls and international expansion. UBS sees annual earnings growth at a 13% pace over the next there years, and 10% growth in store space. The company should earn $4.58 a share in the fiscal year ending January 2007 and $6 a share the following year. Although the stock has traditionally traded at a lower price-earnings ratio than its competition, UBS thinks Abercrombie's valuation will move up to the group average, making $90 a reasonable 12-month target price.
Coldwater Creek sells clothes, jewelry and small home deacute;cor. Its target customers are women between the ages of 35 and 60 with household incomes of $75,000 and up. The stock (CWTR) closed at $25.89, up 2.7%, on December 19 after UBS upgraded it from neutral to buy. Coldwater Creek stands above its peers for its triple-channel strategy, says UBS -- the retailer markets merchandise via its catalog, online and at its 230 stores. Again, markdowns could accelerate in the next two weeks, which could lead to disappointing fourth-quarter earnings.
A good chunk of Coldwater's growth is likely to come from expanding the number of its retail stores to about 500 over the next four to five years. UBS sees 25% annualized growth in square footage over the next few years, and 25% annualized growth in earnings per share. If the stock trades in line with its five-year average and with historical trends for comparable retailers, it should command 23 times earnings, giving it a price within the next 12 months or so of $30, based on UBS's estimated January '08 earnings of $1.30 a share.
So think about adding a retail stock to your portfolio. Maybe that way, post-holiday returns can take on a whole new meaning.