An Oasis of Strength in These Women's Retailers

 | Sep 02, 2012 | 10:30 AM EDT
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Last week, a host of retailers delivered solid August same-store sales data. That constituted some much-needed good news in an environment that's been lacking consistently positive economic data.

In his Jackson Hole, Wyo., speech Friday, Federal Reserve Chairman Ben Bernanke made it clear he's concerned about sluggish economic growth, but recent retail sales data reveal a mostly resilient consumer. These days, it's not easy to find retailers showing consistently strong earnings and sales growth in recent quarters, as well as relative price strength. However, two fast-growing names fit the bill, and both are scheduled to report earnings this week: Francesca's (FRAN) and Ulta Beauty (ULTA).

Francesca's, with market capitalization of $1.5 billion, is set to report Tuesday after the close. The company operates retail boutiques offering apparel, jewelry, accessories and gifts to an 18-to-35 female demographic. It operates about 327 boutiques in 43 states.

The company's execution in recent quarters has been solid, and another strong period of growth is expected. Fiscal second-quarter profit is seen rising 60% to $0.24 a share, with sales seen up 39% to $71.1 million.

Results had been impressive in June, with the bottom line surging 100% from a year earlier to $0.20 a share. Sales rose 49% to $61.3 million, and same-store sales climbed an impressive 15.5%. Meanwhile, operating margin increased 350 basis points to 23.9%.

Francesca's shares continue to hold near highs after a recent breakout above $32.59. The stock has lost ground in seven out of the past 10 trading sessions -- but, headed into Monday, it was only 4% from a 52-week high. Overall, the stock remains under accumulation.

This company arguably falls under the category of "priced to perfection" at this point, but I wouldn't be surprised to see another strong quarter from Francesca's Tuesday. The stock is a pricey one, currently selling at 57x trailing earnings and 32x forward earnings, but the company's solid track record of execution makes the name worthy of a premium multiple.

Francesca's (FRAN) -- Daily

Meanwhile, beauty retailer Ulta Beauty is due to report Thursday after the close. It operates 489 stores in 45 states, and has a market capitalization of $5.9 billion.

Quarterly profit is seen rising 34% from a year earlier to $0.51 a share, with sales anticipated up 20% to $473.8 million.

Much like Francesca's, Ulta isn't a cheap stock -- it's currently selling at 45x trailing earnings and 29x forward earnings. However, the company also has a growth story to justify a lofty valuation. Full-year profit is expected to rise 34% for fiscal 2013 (ending January 2013), with fiscal 2014 estimates currently at 27% above current-year targets.

Some would argue that Ulta is in a late-stage base, given that it's already experienced a big price run, but the stock reset its base count last year when it hit a low of $48.28 in late August. The shares undercut their low of a prior consolidation, meaning enough sellers were shaken out of the stock to wipe the slate clean and reset the base count. The stock broke out in January and is currently working on a second-stage base. An accumulation week earlier this month strengthens its chart, because that points toward institutional buying.

Even though I'm wary that these shares have gained 300% since their September 2010 breakout above $27, I think there's a chance for more upside here, given Ulta's consistent track record. I'm expecting strong earnings and solid outlook Thursday, but I'd like to see the stock prove itself a bit more. I would only be a buyer here on a heavy-volume breakout above $98.

Ulta Beauty (ULTA) -- Weekly

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