Looking For Good Buys

In an uncertain economy, it may be too early to bail out on retail stocks

CVS Caremark (CVS), but Parrish says Walgreen Co. is particularly strong. In its 2007 fiscal year, which ended Aug. 31, the company reported sales of $53.8 billion-a 13.4% climb over 2006-and same-store sales growth of 8.1%. Parrish says that sales of both drugs and front-end items, such as shampoo and paper towels, are experiencing strong growth.

What’s more, Walgreen Co. has expanded into a nearly 6,000-store empire with virtually no debt-an unusual situation for a capital-intensive retailer. For years, the company’s same-store sales have soared quarter after quarter, so there’s naturally a question of how much longer that can last, Parrish says. But Walgreen’s price/earnings-to-growth ratio-a measure of how much an investor is paying for earnings growth-is at a five-year low, meaning it is actually undervalued.

The retailer of casual apparel for youth posted stronger than expected back-to-school sales, reporting a 6% increase in August same-store sales-beating analysts’ predictions of 2.1%. Based in New Albany, Ohio, Abercrombie should register modest single-digit increases in same-store sales for its fiscal year ending Jan. 31, 2008, according to Marie Driscoll, director of the consumer discretionary retail group at Standard & Poor’s Equity Research Services.

The company also owns the popular Hollister chain and continues to grow both in the U.S. and abroad. Its latest brand is RUEHL No. 925, which targets post-collegiate consumers. So far, the company has built 16 stores and another new brand is expected to be introduced early next year. Driscoll expects Abercrombie’s expansion to help sales grow 15% for this fiscal year and 13% the following year.

Abercrombie shares are cheap, Driscoll says. The company’s forward price-to-earnings ratio-the price of its shares compared with its projected earnings-recently stood at about 13, which was 15% below its peer group and 5% below the S&P 500.

The Minneapolis-based chain is a good bet both for defensive investors and sizzle seekers, analysts say. Discretionary items-such as clothing-bring in healthy profit margins, says Chris Tuitt, an analyst with T. Rowe Price, the Baltimore-based mutual fund company. But if consumers grow conservative, the company can always fall back on consumer staples, such as laundry detergent and other household products. “So if things turn out not so great, they’re not going to fall off a cliff,” says Tuitt, adding that the company has averaged 5% annual increases in same-store sales for a decade. “I think Target should be a great investment over the next year or so.”

But what makes Target a better investment than other discount stores? The company has better merchandise and stronger customer loyalty, and on average sells a greater number of expensive items than its rivals, says Parrish. “People want to shop at Target because of what they sell and how they sell it,” he says. In August, Target posted second-quarter earnings growth of 14%, and same-store sales growth of 4.9%. CEO Bob Ulrich says that projected earnings of $3.60 per share “remains within the range of likely outcomes,” for 2007, evidently not yet feeling the sting of a possible slowdown in consumer spending.

In the end,

Pages: 1 2 3
ACROSS THE WEB