What Amazon Effect? 8 Favorite Stocks in Specialty Retailing

 | Dec 21, 2017 | 9:00 AM EST
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Despite competition from online shopping platforms, holiday shoppers are still finding their way to bricks-and-mortar stores to choose apparel. Several MoneyShow.com contributors are bullish on the prospects for specialty retailers selling footwear, apparel and fashion accessories.

John Buckingham, The Prudent Speculator

Following better-than-expected second quarter performance, specialty branded footwear retailer DSW Inc. (DSW) turned in a subpar fiscal 2018 Q3 that was materially impacted by the hurricanes that hit Texas and Florida. In response, management lowered its earnings forecast and investors bailed on the stock.

While the lowered guidance is obviously disappointing and we understand that bricks-and-mortar retail continues to face some stiff operating headwinds from numerous directions, including titans Amazon (AMZN) and Walmart (WMT) , we continue to think the stock is undervalued.

The shares recently traded at just 13 times next 12-month earnings estimates, while yielding 3.9%, and we think the company has been making progress and taking necessary steps to strengthen its omnichannel business strategy.

We still believe the DSW has an opportunity to take market share in the fragmented footwear market and we like that management has been buying back stock. Since 2013, DSW has returned over $600 million in dividends and share repurchases. Our target price remains $28.

Shares of American Eagle Outfitters (AEO) jumped following the apparel retailer's quarterly results that showed a 3% increase in its same-store comparable sales and a forecast for a solid Q4.

American Eagle jeans set a record for volume in the third quarter, and all of the men's and women's bottoms categories posted the best third-quarter results ever. Looking ahead, the company said that it anticipates comparable store sales increase in the mid-single digits for Q4.

While fashion trends are always very fickle, we continue to like that the balance sheet carries no long-term debt (though there are lease obligations) and that its investment in an online sales presence is paying off.

We continue to believe that the company is doing the right things to drive traffic and remain popular and relevant with younger consumers, always a tough demographic.

American Eagle recently traded at a bit above 14 times forward earnings estimates and offered a 2.9% dividend yield. We understand that mall-based retailers are likely to continue to face stiff operating headwinds, but given the continued operational progress, we have boosted our target to $19.

John Staszak, Argus Research

We are upgrading Nike (NKE) from "Hold" to "Buy." Nike's strong brand and product pipeline have enabled it to raise prices and increase sales of both apparel and footwear. We think some retailers seeking to boost weak sales are turning to Nike to build customer traffic, increasing its bargaining power as a supplier.

Meanwhile, in response to changing purchasing trends, Nike is beefing up its direct-to-consumer channel, particularly its e-commerce business. Over the long term, we expect Nike to continue to dominate the athletic apparel and footwear market, and note that it has a particularly strong presence in high-end footwear, thanks to its marketing strength and endorsements from famous athletes.

Although the industry remains fiercely competitive, we expect the company to build on its dominant position through its globally recognized brand, innovative products, economies of scale and rapid growth in emerging markets.

In the near term, we expect an accelerating U.S. economy and solid results in China to benefit earnings. Based on investments in its company-owned stores and e-commerce business and management's ability to execute its growth strategies, we are raising our FY 18 (May) EPS estimate to $2.50 from $2.46. For FY 19, we are raising our forecast to $2.80 from $2.78.

Our financial strength rating for Nike remains high, the top of our five-point scale. Nike has a strong balance sheet, very low debt, and enough cash to cover all current obligations. Multiplying our revised FY 18 estimate by 30 generates a price target of $75.

Tyler Laundon, Cabot Small Cap Confidential

The story behind Canada Goose (GOOS) begins in 1957 with a Polish immigrant making cold-weather workwear out of a Toronto warehouse.

He then branched out to Europe and established a loyal customer base of dog sledders, Arctic researchers, petroleum engineers and others who frequently found themselves exposed to the harshest environments.

Fast-forward about 50 years and you begin to find celebrities wearing the company's jackets, which, for some models, retail for $1,000 or more. Then Kate Upton was featured on the cover of the 2013 Sports Illustrated Swimsuit Edition wearing a white Canada Goose jacket and things really took off. The clothing, which is extremely well made, became as much a status symbol as a way to stay warm.

Analysts like the story because Canada Goose has been rapidly expanding its direct-to-consumer business, which adds significant revenue above and beyond the more established wholesale channel.

The company has also been opening its own retail stores and introducing additional products (including knitwear) in its stores, which should further diversify revenue into the shoulder seasons.

When the company reported Q2 results on Nov. 9, it trounced analyst expectations with revenue expanding by 35% and EPS of $0.29 beating by $0.08. After those results, analysts increased their outlook for next year to reflect 22% revenue growth and 26% EPS growth. Canada Goose is one of my best ideas among Canadian small caps.

Jim Pearce, Systematic Wealth

Signet Jewelers Limited (SIG) is a retailer of diamond jewelry; its segments include Sterling Jewelers, Zales and Piercing Pagoda. It isn't often that our "profit matrix" assigns a near-perfect score to a stock for both its value and growth metrics, but that's what happened when shares of Signet tanked after reducing guidance for the fourth quarter.

From a value perspective, the stock was recently priced at slightly more than 7 times reduced forward earnings, and only 0.5 times sales. As for growth, its yield-adjusted PEG ratio of 0.5 suggests it is oversold despite the reduced profit outlook.

Of course, it doesn't take much to send a retail stock reeling these days, but a drop of that magnitude is extreme. Even still, with so little momentum behind retail stocks, it will take more than a reversion to the mean to get SIG moving back up the charts.

Given the very low expectation set by virtually every retailer that gave forward guidance for holiday sales, anything better than a washout should push the entire retail sector higher.

I don't see much more downside risk left in the stock. But it may take confirmation of decent Christmas sales to push it back above $60, which is why I am putting a three-month target hold on this position.

Mike Cintolo, Cabot Top Ten Trader

Back in October, we suggested investors keep an open mind with respect to retailers, which had been battered this year, and early indications from the sector suggest the holiday shopping season is off to a strong start.

One can look at rising wages, upbeat consumer confidence and low unemployment as catalysts, but the clearest measure of investor enthusiasm is a strong rally in retail stocks over the past three weeks.

Michael Kors (KORS) has been one of our preferred stocks to ride the wave. The turnaround plan, called Runway 2020, includes rationalizing its store fleet, cutting promotional pricing and enhancing product offerings, most notably through the acquisition of Jimmy Choo (shoes, bags and accessories).

The release of Q2 results in November shows that the game plan is working. Revenue growth of 5.5% was slightly better than expected and retail net sales growth of 8% was helped by 56 net new store openings and e-commerce growth in Europe and Asia.

The company's growth outlook is much brighter, too, with revenue growth in the 3% to 6% range now expected in fiscal 2018 and 2019 (March). Earnings are expected to be flat next year but our guess is that will prove very conservative.

G-III Apparel (GIII) is a diversified apparel company with a portfolio of over 30 licensed and proprietary brands, including Calvin Klein, Donna Karan, Kenneth Cole, Cole Haan, Guess, Tommy Hilfiger and many other high-profile names.

The company also has licenses with the four major sports leagues and over 100 colleges and universities. G-III has been aggressive in the acquisition of major brands over the year, including its 2016 purchase of the worldwide rights to the Karl Lagerfeld brand, and the Donna Karan International and DKNY brands.

The company's stock got a big boost from the Dec. 5 quarterly earnings report that reversed a seven-quarter trend of declining earnings with an 11% increase. Revenue growth booked its fourth consecutive quarter of increases with a 16% gain. G-III Apparel is on a roll.

Lululemon athletica (LULU) made its biggest advance from 2009 to 2011 as the company's yoga-inspired wear became the poster child of the "athleisure" movement that gained popularity back then.

Some company snafus and quality control issues made business tough -- the stock has been moving sideways for the past four years. But now it appears lululemon may be turning the corner and investors are responding.

In the third quarter, sales (up 14%) and earnings growth (up 19%) both accelerated and topped expectations, and some other tidbits (like online revenues growing 25% and international growth) were very encouraging.

Moreover, management sounded a very bullish tone for the holiday quarter. Analysts see earnings up 22% this quarter, and long-term, the top brass expects revenues to hit $4 billion by 2020 (up 17% annually during the next three years). It's not the vibrant growth company it was a few years ago, but lululemon appears to be back on a solid track.

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