2 Off-the-Radar Retail Stocks Are Worth a Look
byAug 4th 2011 4:45PM
One path to successful investments is to find misunderstood or overlooked stocks. Many retail stocks are as readily visible as taking a drive down any American street -- think Wal-Mart (WMT), Best Buy (BBY), or CVS (CVS).
While more well-known retail stocks may turn most investors' heads, there are some off-road players competing quite well in the current economy. These retailers don't tend to show up on most people's radars -- including mine, until recently. Here are two that surprised me when I slowed down to take a closer look.
There's a Lot More to This Company I Loved to Hate
For years, I couldn't understand why so many male investors thought highly of Dress Barn. Granted, I was put off by the name and the fact that it's just not my kind of store. (The "barn" doesn't exactly conjure up the kind of place most women want to shop for a dress.)
I can put my personal feelings aside and admit that maybe times are changing. Dress Barn is no longer a stand-alone business; it now represents just one part of a company called Ascena Retail Group (ASNA). Ascena also owns Tween Brands, which operates "tween" retailer Justice, and Maurice's, a retailer formed in 1931. Ascena's merger with Tween Brands took place in November 2009.
Beyond Dress Barn, Ascena has been delivering considerable growth recently. In 2010, its net sales grew 23% to $2.91 billion, and it clocked 6% growth in same-store sales.
Much of this growth relates to its Justice brand, which targets girls ages 7 to 14. Justice may be Ascena's most important retail asset at the moment; fourth-quarter same-store sales at Justice surged 14%.
Granted, the Dress Barn element may still end up being a drag, and all retailers face a very competitive landscape right now. However, Ascena's worth a look because it's trading at just 11 times forward earnings, and it's also got a clean balance sheet, with $367 million in cash and just $25 million in debt.
The Fast Fashion Company That You May Have Never Heard Of
Ever heard of rue21 (RUE)? Me neither, until recently. The company went public in 2009, not exactly an easy year for retailers. But it's been proving it's up to the challenge of delivering growth in this tough environment: It recently opened its 700th store.
Last year, rue21 delivered a 20.8% increase in sales and a 2% increase in same-store sales. Although the same-store sales number may sound a little modest, it was up against a tough comparison, given its 7.8% increase in comps in the prior year.
The company has a little more sex appeal because it operates in the fast fashion niche. This retail subsector is all about getting limited quantities of hot, trendy apparel into stores fast. The idea that those fashions may sell out quickly drives merchandise sales. The fact that the fashions include inexpensive price tags works even better in today's economy.
Rue21 competes with other fast fashion retailers like Forever 21 and H&M. Its impressive sales growth shows that its rivals aren't presenting too much of a problem, though. It trades at just 16 times forward earnings, and it's got no debt on its balance sheet.
Search off the radar for fresh stock ideas
Retailers with far more name recognition get tons of attention from investors, but it's important to go beyond the big names of the shopping scene, like Gap (GPS) and Abercrombie & Fitch (ANF), and search for less trendy stocks. Off-the-radar retailers may be doing better business than you think.
Motley Fool analyst Alyce Lomax owns no shares of the companies mentioned. The Motley Fool owns shares of Best Buy, Wal-Mart Stores, and Gap.