Shopping for Value ...

10/07/2005 12:00 am EST

Focus:

Kelley Wright

Managing Editor, Investment Quality Trends

"The market’s low-fuel warning light is starting to flicker," cautions Kelley Wright. "But we aren’t losing any sleep because the stocks we own are high-quality with long-established rising dividend trends." Here are two retail stocks that meet his strict value criteria.

"Claire’s Stores (CLE NYSE) are located primarily within shopping malls and appeal to girls aged 7 to 17 with a wide variety of costume jewelry and other fashion accessories. The company has stores in all 50 states, Puerto Rico, Canada, and the Virgin Islands, and in 1996, began overseas expansion into the UK, Switzerland, Austria, Germany, France, Ireland, and Japan. The average cost for an item in Claire’s is $4.00, making the company’s revenues all the more impressive. Recent trends have seen heavy sales of the company’s fashion jewelry inventory.

"Claire’s Stores continued its impressive streak of gains by beating earnings estimates for the second quarter. Net income rose 8% to $0.36 per share from the $0.33 realized during 2004. Same-store sales moderated from 10% seen last year to 5%. During the third-quarter the company has announced its expectation for earnings to fall in the range of $0.27/share to $0.30/share. For 2005, CLE reaffirmed its previous outlook for earnings per share of $1.54 to $1.65. Under this scenario, the company’s payout ratio would drop and yet another dividend increase would become a likely possibility.

"CLE is undervalued with a yield in excess of its historic high of 1.5%. From current levels, the company holds a 233% upside potential to an overvalue price of $80, low yield of 0.5%. We continue to see very strong growth potential from Claire’s. The company is run conservatively, maintaining no long-term debt. Claire’s is also recognized among the top of our list for its frequent dividend increases, which are typically well protected by a very low payout ratio. The shares will continue to represent historic value with low downside risk up to a price of about $30.

"TJX Companies (TJX NYSE) operates seven off-price chains in the US, Canada, the UK, and Ireland. The company’s infrastructure includes 400 buyers, 10,000 vendors, and over 2,200 stores. These allow TJX substantial buying power and particular expertise in off-price buying. All store concepts target a typical customer in the middle class, with Bob’s Stores focusing on moderate to upper-middle income bracket. Inventory is kept extremely liquid and overhead is kept low by reducing expenditures on in-store fixtures and other unnecessary costs.

"The company’s flagship stores T.J. Maxx and Marshalls represent the largest off-price retail chains in the US. Both stores primarily target female shoppers who would typically frequent a department or specialty store. Its 216 HomeGoods stores sell home fashions and giftware. Winners and Homesense are the company’s off-price women’s stores in Canada. The company also has a monopoly on the off-price retail segment in Europe. A.J. Wright targets the moderate income shopper with apparel and its Bob Stores, acquired in 2003, has an emphasis on casual clothing and footwear for men.

"TJX is undervalued at $20.50 and has 129% upside potential to an overvalue price of $48. In addition to having an excellent record of dividend growth, the company has low debt, and an A+ S&P rating for earnings and dividend quality. If economic slowdown due to inflation or Katrina, it can be assured that customers will seek value wherever possible. TJX as a supplier of value clothing and apparel will likely see increased attention from those customers seeking to cut costs and save wherever possible."

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