Making Money With Retailers

Investors love good news, especially in the form of rising EPS and expanding profit margins. When buying shares of retailers, though, it often pays to stay away when everything looks rosy and to get involved when business is, hopefully temporarily, in the dumps. Here are a few recent examples of that theory in action. Zumiez posted all-time record profits of $1.72 per share in FY 2014. Its stock ran to near $42 shortly before that year's Q4 results were released in early 2015. Net profit margins were relatively high, though, and ended up unsustainable. EPS declined in both FY 2015 and FY 2016. By the summer of 2017 margins had contracted to just 2.9% and ZUMZ was offered as low as $11.40. That's painful if you were a buyer or holder when times were much headier. Brave souls who held their noses and bought near the 2017 low, despite the worst profit margins in years, were well rewarded. About a year later they had the chance to book 187% gains. That was not an isolated incident. Specialty retailer Advance Auto Parts had its best year ever in FY 2015. Net profit margins were relatively strong as the stock ran towards $201. Fast forward to the summer of 2017. Profit margins dipped by 28.8% from 2015's level and EPS fell from $7.82 to $5.37. Intrepid traders who know that margins fluctuate in cycles got the chance to buy at just 14.7x those depressed earnings. That was AAP's lowest multiple in five years. Within 12-month the stock had more than doubled as margins began recovering and EPS picked up again. Counterintuitively, owning AAP and ZUMZ when times were flush was a bad idea. Buying in when the numbers were crappy worked out much better. Still not convinced? Take a look at the data on Abercrombie & Fitch . Net profit margins of 3.1% to 5.3% were in force when ANF was flying high, near $78. FY 2016 and 2017 saw profits virtually disappear as net margins contracted to as low as 0.1%. What happened next? You guessed it. Things started getting gradually better. ANF took off from under $9 in the summer of 2017. Less than a year later they had more than tripled in value, a 237% trading opportunity. It's probably too late to play any of the names already mentioned. One of my favorite stocks, Francesca's Holdings is now unusually depressed and appears primed to be the next huge rebound candidate in this industry. As of Oct. 19, 2018, FRAN bottomed near $2.80. The company is debt-free, and has always made money over each full year. From 2011 through 2016 net profit margins ran from 8% to 15%. They deteriorated to 4.0% during FY 2017. It is expected that margins will trough this year at an estimated 1.5%. Management has taken many steps to make things better. Improvements should start showing up in the quarters ending next January and beyond as year-over-year comparisons become ridiculously easy. Value Line's analyst sees EPS bottoming out at 20 cents this year then rebounding to $0.85 or so over the coming three to five years. Best of all, those projections only assume a partial recovery in profit margins, to 4.3% within five years. Based on Francesca's previous history that projection may prove to be too conservative. There is no reason FRAN can't be $6 or better within 16-months and reach $10 - $20 over the next few years. Note the previous years' peaks on the chart below. FRAN touched $8.50 just months ago. It topped out between $18 and $37 during every calendar year from 2011 through 2017. Company insiders, who know best what's going on, have expressed confidence in Francesca's future. Four separate people, including FRAN's CEO and CFO, made five insider buys this year at prices ranging from $3.93 to $6.37. No insiders have sold any stock during 2018 year to date. We can now buy way, way cheaper than they did. Huge selloffs always appear scary. WE all worry that somebody else must know something we don't. Why else would a stock just keep going lower and lower? The facts on Francesca's, though, tell us there are no major problems. Profit margins are likely to improve, and the share price is likely to surge, just as they did with ZUMZ, AAP and ANF. Don't give up on this stock. If you own it, keep it. If you don't have it now, consider buying while the price is still cheap and upside is huge.

Making Money With Retailers

When buying shares of retailers it often pays to stay away when everything looks rosy and to get involved when business is, hopefully temporarily, in the dumps.

Columnist Conversation

This Weekend on Real Money

Wednesday Morning Fibocall for 1/13/2021

Tuesday Morning Fibocall for 1/12/2021

COLUMNIST TWEETS

Please Join or Log In to manage and receive alerts.