For Discriminating Retail Investors

 | Aug 30, 2013 | 12:30 PM EDT  | Comments
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It has been a fairly dismal second quarter for apparel retailers. For every Gap (GPS) that reports earnings that provide investors with encouragement, there is a Macy's (M) that reports disappointing results and guidance. The teen retailing space is a disaster, judging from the results from American Eagle (AEO), Aeropostale (ARO) and Abercrombie & Fitch (ANF).

I am underweight the sector as retail sales are growing at about 2%, year-over-year, right now and retail traffic in U.S. stores has declined for eight of the last 10 weeks, according to ShopperTrak. With the overall retailing sector having run up some 25% over the last year, the area looks somewhat overbought to me. However, some apparel retailers are bucking the trend by reporting results that are beating expectations. Here are two retailers that have reported positive results and look attractive -- especially if we see another dip in the market.

Guess? (GES) posted results Wednesday that blew through earnings estimates and also beat on revenue expectations as well. The retailer reported earnings of 52 cents a share which was 17 cents above the consensus. The company beat extremely low expectations driven by the poor results posted by other retailers that reported results earlier in the quarter. That being said, Guess did a solid job in raising operating margins which improved 150 basis points (bps) in the quarter.

I have had the shares since they were in the $20s and I am holding onto my position even though they had a big pop after second quarter results. The company still is struggling to post revenue increases in this challenging retailing environment but it appears the retailer's turnaround efforts are starting to bear fruit in improving margins. Guess? will benefit greatly as Europe recovers since it gets a significant amount of its sales from the continent.

The company has an extremely strong balance sheet with over $500 million in net cash on its balance sheet, which accounts for some 20% of its overall market capitalization. The shares also pay a 2.8% yield. The stock is not expensive, as it is trading at approximately 11x next fiscal year's projected earnings (after net cash is taken out of the equation). I will be adding to my position if we see any selloff in the overall market.

Ann (ANN) also posted results late last week. The women's retailer reported earnings of $0.76 a share, which was a dime a share above the consensus estimate. Revenues were mostly in line. Same-store sales were positive, showing almost a 3% gain. Particularly strong were same-store sales at its mainstay Ann Taylor franchise, which had better-than-9% gains.

Similar to Guess?, the company has a strong balance sheet with no net debt. Revenues are projected to grow 6% to 7% both this fiscal year and the next. Earnings per share (EPS) should increase in the 8% to 12% range over the next two fiscal years. Just before the earnings release, Janney Montgomery upgraded the shares to Buy from Neutral, calling the retailer's fall product line "compelling and well-positioned."

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