Ready for the Holidays

10/29/2004 12:00 am EST

Focus:

Jim Jubak

Founder and Editor, JubakPicks.com

"Retailers haven't had it easy in the last couple of months; so why have retail stocks been strong?" asks Jim Jubak . "Investors are looking past current weakness in expectation of a strong holiday shopping season. And we've found several retailers that are ready for the holidays."

"Holiday deliveries started hitting stores in October and inventories are at reasonable levels. So it looks like fiscal third-quarter earnings won't be crushed by big markdowns and early sales. Forecaster Retail Forward is projecting that holiday sales will climb 6% to 6.5% from last year, which would beat the 5.1% increase recorded in the 2003 holiday season. Even the Grinch among retail forecasters, Davidowitz & Associates, is projecting a 3% to 4% increase. In any shopping season, the retailers that execute best collect more than their shares of sales. So it makes sense to go with those retailers that have had a hot hand recently at picking merchandise, pricing it, and keeping their best sellers in stock.

"Jos. A. Bank Clothiers (JOSB NASDAQ) has had exactly that kind of hot hand recently. In the fiscal second quarter, the company earned 25 cents a share, up almost 80% from 14 cents a share a year earlier. Sales climbed 27% and same-store sales grew 10.2%. The details are even better. Gross margin rose by 4.6 percentage points as the company cut costs. Inventory grew by 9.4%, below the 27.3% sales growth, a sign of tight controls and smart product decisions. The company will start a major brand-building advertising campaign with $2 million to $5 million in ads on Election Day. The company is on track to open 55 to 65 stores in 2004, up from 50 stores in 2003, as the company continues its expansion in the recently entered California and Florida markets. The shares currently trade at 16.9 times projected earnings for the fiscal year that ends in January.

"Urban Outfitters (URBN NASDAQ) has been on the right side of fashion trends this year at both its Urban Outfitters and Anthropologie divisions. That goes for both its merchandise selection and the in-store environment the company has built. In its update on the quarter that ends on October 31, the company said that sales were 'significantly ahead of plan.' That might let the company beat earnings expectations again despite projections for 53% earnings growth in the October quarter and 72% growth for the year that ends in January. A quarterly surprise probably shouldn't be a surprise since URBN has crushed Wall Street earnings projections for the last five quarters by an average of almost 18%. The shares trade at 31.9 times projected earnings for the fiscal year that ends in January. This kind of multiple makes this a pick with high potential rewards and high potential risk.

"J.C. Penney (JCP NYSE) is a turnaround story. The stock is up 40% this year, with plenty of turnaround left. The company has forecast, and affirmed, same-store sales growth of 2% to 4% and earnings of 35 cents to 40 cents a share for the October quarter, about 20% to 25% higher than a year earlier. In the last year, J.C. Penney has retired or repurchased $950 million in debt, significantly strengthening its balance sheet. It has increased sales per square foot to $143. And the $3.5 billion in net cash from the sale of the Eckerd drug store division gives the company room to reduce debt further and buy back shares. An improvement to an investment-grade credit rating isn't out of the question in 2005, which would allow the company to cut its borrowing costs and free up more cash flow. The shares trade at 17.5 times projected earnings for the fiscal year that ends in January."

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