Dressed for Success

06/10/2005 12:00 am EST

Focus:

Gregory Spear

Editor and President, The Spear Report

The Spear Report draws its investment advice from both an overview of the stock ideas of the leading financial newsletter advisors and the excellent fundamental and technical skills of editor Gregory Spear. Here, he looks at a pair of opportunities in the retail clothing sector.

"Urban Outfitters (URBN NASDAQ) is an innovative specialty retailer offering ‘lifestyle merchandise’ to highly defined customer niches through its Urban Outfitters and Anthropologie stores as well as its Free People wholesale division, which sells to some 1,100 specialty stores, department stores, and catalogs. The company is still young and small by national standards. URBN is a true growth stock and thus carries a high p/e multiple. In the most recent quarter, earnings per share were up 60%, year-over-year. That is impressive considering that the company funds its expansion with cash from its existing operations.

"Combined same store sales were up 11% with improving margins. The increase in margins was primarily due to the company's ability to sell more new merchandise quickly at full price, rather than at markdown prices later in the season. To draw a loose comparison, Urban is like the Starbucks of clothing retailers. The stock is pricey, but it continues to grow into its valuation by delivering quarter after quarter of impressive growth. Our in-house retail analyst happens to have two teenage daughters and can testify to the almost cult status that these stores have among that demographic. Technically, on a daily chart, the stock is overbought, but on a weekly chart it is just starting a new leg up. Buy any dip and hold on.

"Men's Wearhouse (MW NYSE) is also a ‘suitable’ investment. Founded in 1973, Men's Wearhouse is the home of finely tailored suits, shirts, and sport jackets for the upwardly mobile professional male that wants to dress for success. There are very few retailers that focus exclusively on men's wear, so the company is essentially a niche player. To succeed in a niche you have to let people know you are there, and you may have seen founder George Zimmer on television, touting the company's marketing slogan, ‘You're going to like the way you look; I guarantee it!’

"The company recently reported good quarterly numbers, with sales up 14%, and same-store sales up nearly 11%. Net earnings shone brightly at 50%, ringing the register at $0.61 a share, a 10% earnings surprise. Like Urban Outfitters, gross margins improved by over 200 basis points, driven by fewer markdowns, lower costs, from direct-sourcing arrangements and new revenue streams from its new dry cleaning and corporate uniform business. For the full year, Men's Wearhouse expects to earn between $2.40 and $2.53 per share. The company also announced a 3-for-2 stock split and increased its share repurchase program to $50 million. For five of the last six years, it has made the Fortune list of the 100 best companies to work for. Technically, the monthly chart shows a long-term breakout in progress. What's not to like?"

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