As Shoppers Roll Out, a Look at Retail Stocks

This year, Thanksgiving proved to be the Maginot Line between the autumn harvest and holiday shopping madness. Stores touted their Black Friday markdowns as early as Tuesday, scores of retailers threw open their doors on the once sacrosanct family holiday, and shoppers surged into the malls. After two years of recession-plagued holidays, who can blame them? People seem to be in the mood to shop.

If you ve been following the Common Sense advice, you just got a holiday bonus in the guise of a buy-out of J. Crew, the resurgent specialty retailer I recommended in September, when it was trading at $34. When trading was halted on Tuesday, it had jumped to just under $44, for a tidy 30% gain in less than three months.

And it didn t take a buyout to profit from retail this fall. Another stock I recommended in early September, Abercrombie & Fitch, was also trading around $34 a share. On Friday, it closed over $48 an even better performance than J. Crew. By comparison, the S&P 500 went from 1092 to 1189 over the same period, a gain of just under 9%.

Now that the recession is officially over (even though to many it feels like it isn t), consumer confidence seems to be building steam, working its way down the income ladder. Barron s reported this week that consumers are flexing their wallets. I recommended luxury retailers earlier this year on the theory that spending would rebound first at the top income levels, and now the sweet spot seems to be a notch or two down, at stores that offer some fashion flair and brand name cachet, but still appeal to middle and upper-middle class shoppers. J. Crew and Abercrombie fit that bill perfectly and, I predict, are in for solid holiday seasons.

To try to replicate my success with those stocks, we ran a similar screen to the one I used in September, looking for retailers with sales momentum. My theory is that while retail trends come and go with the speed of a teenager s attention span, they re not going to change much between now and Christmas. So I looked this week for stores with the strongest year-over-year sales comparison for the most recent quarter.

J. Crew and Abercrombie again showed up near the top, with sales increases of 14.0% and 15.7% respectively. But some other retailers had even better gains. They may lack the fashion cachet of a J. Crew or Abercrombie, but they cater to customers who should benefit as the economy recovers. Here are three promising candidates, one or all of which might be the next J. Crew or Abercrombie:

Dress Barn: Revenues are surging at Dress Barn (up 77%), though a large part of that is due to acquisitions, such as tween retailer Justice. (Same-store sales were up 4%.) I m obviously not the target customer, but my women friends say Dress Barn offers great value and style for women who can t squeeze into a size two or smaller. The web site featured an array of festive dresses that looked perfect for holiday entertaining. Although the stock is off its lows, it s been drifting lower all year, recently selling at $24 a share. The company has a trailing twelve-month price-to-earnings ratio of around 14, which strikes me as a bargain, particularly compared to Abercrombie s P/E of 41.

Zumiez: If Dress barn is too staid for you, consider sports equipment and fashion retailer Zumiez, which caters to the action-oriented 18-24 crowd. (Think snowboarding in winter, surfing in summer.) The formula is working: Revenues were up 14.7% year over year. This is a momentum and not a value stock: its shares have surged this year, from a low close of $12.29 in early January to just over $30. The price-to-earnings ratio is a lofty 85, double Abercrombie s. This is too high-octane for me, but if you re into extreme sports, this might be your stock.

Urban Outfitters: I still own a tuxedo I bought at J. Press in 1975, and now I see the iconic Ivy League retailer is catering to a new generation by joining forces with hip Urban Outfitters. J. Press is one of many brands featured at UO (which also owns Anthropologie.) Third-quarter sales were up 13.4% year-over-year. Although the stock has recently jumped, at $38.46 it s still below the nearly $41 it sold for in April.

INVESTOR CENTER

MARKETS:
Chart
TODAY
Portfolio Chart

RESEARCH STOCKS & FUNDS

Subscriber Tool

Stock Screener

Screen over 7,000 stocks using more than 100 different variables.

Portfolio Tracker

Track your own buys and sells

See More Tools

Answer Engine
Find Answers to Life's Challenges  

Find solutions to this and many other problems using

Answer Engine from SmartMoney. 

Copyright 2012 Dow Jones & Company, Inc. All Rights Reserved
This copy is for your personal, non-commercial use only. Distribution and use of this material are governed by our Subscriber Agreement and by copyright law. For non-personal use or to order multiple copies, please contact Dow Jones Reprints at 1-800-843-0008 or visit
www.djreprints.com.