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5 great back-to-school stocks
Its time to go do your back-to-school shopping. As you look at pencils, backpacks and clothes, check out the stocks of the companies that sell them.
By Robert Walberg
Its that time of year again. Time to take that last summer trip, time to get the football out, almost time to go back to school. All of which means its time for me once again to hit the malls to discover which stores will enjoy success during this increasingly important shopping season.
In all honesty, this is my favorite time of year for shopping. There are none of the pressures and expectations associated with the holiday season, and yet you still get to load up on new stuff. Everything from pencils to notebooks to backpacks to clothes, clothes and more clothes. And the kids, especially the younger ones, really have a blast helping to pick out their goodies.
I've spent the past few days running from store to store and checking off item after item on the supplies list, and Ive prepared a nice little shopping list of my own for all of you. My list consists of those stores that enjoyed an exciting product mix, heavy foot traffic and/or long lines at the cash register. When the back-to-school season is over, these are the stores that I believe are likely to receive an A+ come earnings season.
Urban Outfitters: Kids love it; so do shareholders
My first entrant is a store that, personally, I cant stand spending more than a few minutes in. Not sure why. Maybe its the eclectic mix of merchandise, or maybe its the seemingly haphazard layout. Whatever the reason, Urban Outfitters (URBN, news, msgs) makes my skin crawl. But Im the obvious exception, as the two locations I visited in the Chicago area were mobbed with generally young shoppers loading up on reasonably priced clothing and dorm room accessories. Additionally, I have to admit that the merchandise, especially the clothing, was fashionable, well-constructed and, in certain cases, extremely affordable (Ben Sherman shirts on sale for under $60).
The buzz created by this retailer has not been lost on investors, as the stock has held up nicely during the markets recent turmoil. In fact, the stock is just a couple points off its all-time high and is up an eye-catching 143% over the past year. At nearly 30 times estimated fiscal year 2004 earnings of $0.98 and roughly 3.4 times trailing 12-month sales, Urban Outfitters isnt what we call a bargain. But the company is projected to grow earnings by better than 20% over the next few years, resulting in a PEG, or P/E to long-term growth rate, below that of its peers. The companys attractive and defendable profit-margins, as well as a return on equity north of 24%, also justify its premium valuation. Investors recently expressed some concern in the companys inventory levels, but, based on strong demand, these worries seem misguided.
Aeropostale: Has the price-and-product mix just right
Another store crowded with young shoppers was Aeropostale (ARO, news, msgs). Teen boys and girls were busy buying t-shirts, jeans, shirts and skirts from this relatively low-priced apparel retailer. Mirroring the style of Abercrombie & Fitch (ANF, news, msgs) but beating the pants off its competitor on price, Aeropostale continues to gain market share in this key demographic. Teens are a fickle market, and there is plenty of competition. Right now, however, Aeropostale is getting the mix of product and price just right.
Like Urban Outfitters, Aeropostales stock price reflects the success of its stores. The stock is up more than 60% over the past year; it hit a new 52-week high earlier this week. However, at 22 and 18 times projected earnings for this year and next, the stock is a little more reasonably priced than Urban, especially when you consider that it, too, is expected to see earnings gains averaging better than 20% over the next few years. With a return on equity of 35% and a strong balance sheet, share price is no reason for investors to shy away from this retailer.
Wal-Mart: Big, cheap and lots of very everything
Taking a respite from clothing retailers for a minute, lets focus on the winner in the supplies -- pens, pencils, notebooks, glue sticks -- game. I doubt this will surprise many of you, but Wal-Mart Stores (WMT, news, msgs) enjoys the broadest offering of product at the best prices -- a one-two combination difficult for anyone to beat. For those of you that have followed my reports on the retailing space over the past several years, you know that Im not a big fan of Wal-Marts warehouse approach to retail. I prefer the more open feel of Target (TGT, news, msgs) stores. Having said that, Targets more limited breadth of product in basic school supplies proved somewhat frustrating this time around. Meanwhile, I had no trouble finding what I wanted at nearby Wal-Mart stores. Maybe others felt the same way, as foot traffic in Wal-Mart was noticeably busier than foot traffic in Target.
Whereas my first two selections were small companies with relatively few stores in their chains, Wal-Mart is the largest retailer in the world. Its sheer size advantage is one reason the stock is rarely cheap these days, but the stock has slumped 10% amid concerns over a slowing economy. (The share decline was as much as 15.9% as of Aug. 6.) However, the companys focus on value pricing should help Wal-Mart shine while other, pricier retailers may struggle. With the stock trading at historically reasonable valuations (22 times current year estimates) and hovering near solid support, now is a good time for long-term investors to consider adding exposure to this core retail holding.
Best Buy: The category-killer in electronics
Another core retail holding, Best Buy (BBY, news, msgs) is also well-positioned for a strong back-to-school season. Lets face it when we talk about notebooks today, were not just talking about bound paper, but small computers that adorn most college dorm rooms. Electronic goodies are a staple in todays back-to-school world, and Best Buy remains the category killer in this area. Students flock to these stores to load up on everything from computers, printers and TVs to MP3 players and cell phones. The lines were long and the cash registers busy. Comps (comparable sales) are tough, but Best Buy continues to win share from its competitors by offering the broadest selection of product at affordable prices in generally clean, well laid out stores.
The best thing about Best Buy right now might just be its stock price. Like Wal-Mart, it has slumped a bit over the past year, losing about 5.6%. What the stock lacks in momentum, however, it gains in valuation. Despite its leadership position in the steady growing electronics space, Best Buy trades at just over 16 times current year estimated earnings and only 14 times next years earnings estimate of $3.35. Thats nice entry point for a stock with solid financials and a long history of market/industry out-performance.
Too is a turnaround
My last pick, Too Inc. (TOO, news, msgs), is a turnaround situation. The company was spun off from The Limited (LTD, news, msgs) in 1999 and aims to be the world-class brand for tweens -- girls ages 7 to 14. But merchandising missteps for the past couple of years have resulted in lost market share and miserable stock performance. (The stock fell nearly 60% between May 2002 and Aug. 13.)
While it might take some time to win back customers, the store finally has the right product mix. The cutesy clothes are gone (or at least minimized), with much of the merchandise now looking more streamlined. Managements decision to add signature lines such as Roxy and Jlo (after Jennifer Lopez) is also right on target. Easy year-over-year same-store sales comparisons should make it easy for Too to impress investors going forward, and once the positive surprises start to accumulate, the stock should start the recovery process.
At 15 times current year estimates, the stock is fairly priced considering recent problems. However, as the company rights itself, investors can expect significant multiple expansion, as Too catches up with the rest of the industry.
At the time of publication, Robert Walberg owned none of the securities mentioned in this article.
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