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Think Outside The Big Box

By James Brumley

Tickers in this Article: WMT, FL, DKS, ZUMZ, BEBE, SSI, GPS, URBN, HIBB, BKE

Last week we saw several of the high-end fashion retailers like Abercrombie & Fitch (NYSE:ANF) and Urban Outfitters (Nasdaq:URBN) top estimates. Essentially, analysts underestimated the kind of money consumers would still spend despite the challenged economy.

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Since then we've seen more of the same. From Bebe Stores (Nasdaq:BEBE) all the way to Zumiez (Nasdaq:ZUMZ), we've seen better-than-expected earnings. Amazingly, we're still getting pessimistic outlooks from some of these retail names, but I have to wonder if we're just being low-balled.

Buckle Up
Bebe Stores, Buckle (NYSE:BKE), Gap (NYSE:GPS) and Stage Stores (NYSE:SSI) all reported quarterly results last week, and all were better than expected. Bebe beat estimates by a penny, while Stage Stores and Gap both beat their expectations by two cents. (Read more in Great Expectations: Forecasting Sales Growth.)

Buckle was by far the most impressive, though, pulling in 72 cents, and easily topping the latest estimate of 60 cents. That was considerably better than the comparable quarter from a year earlier when the company had earnings per share of 38 cents. Even when you take out the special one-time gain from an insurance payment, Buckle still made 66 cents per share. And make no mistake about it; Buckle didn't have to shrink costs to do so. Same-store sales, a good measure of retail store sales, were higher too, by 27.8%.

In comparison, despite the 51% increase in earnings, Gap's revenue was down 5% . Same store sales (comps) for Bebe were also down 5%. Bebe saw income decline by 14% to boot. And Stage Stores? Although it was better than the 23 cents per share analysts had guessed (and the 23 cents it saw in the quarter one year earlier), that 25 cents in per-share income doesn't negate the fact that comps were lower by a tad, 1.4% to be exact. Overall, I'd call it a mixed bag, but better than anticipated.

The Sporting Life
It's not just the pure apparel retailers rolling along; the fun and fitness names outdid expectations too. Dick's Sporting Goods (NYSE:DKS), Foot Locker (NYSE:FL), Hibbet Sports (Nasdaq:HIBB) and Zumiez all outpaced their earnings estimates.

Dick's Sporting Goods, despite a 5% dip in profits, topped earnings expectations of 36 cents per share by posting a profit of 39 cents per share or $45.5 million in its second quarter. Same store sales were down 3.7% however.

Zumiez's earning of 9 cents per share were less than the previous comparable quarter's 11 cents per share, but they were still better than the estimated 7 cents. Same store sales were off a little bit.

Foot Locker swung to a profit by pulling in income of 11 cents per share or $18 million. This is much better than the per-share loss of 12 cents for the quarter a year earlier, not to mention better than expectations of 3 cents per share. Comps were only 0.5% lower.

The brightest point here was Hibbett's results. Hibbett's net income was up 2% to $4.8 million; the company's per-share income of 17 cents beat analyst estimates of 15 cents. Same store sales were up 5%. Again, it was a mixed bag.

Outlook
Last week I was bullish on a couple of retail stocks that couldn't be considered 'bargain oriented': Abercrombie & Fitch being one of them. Simultaneously, I wasn't as impressed as most of the market was with Wal-Mart's (NYSE:WMT) numbers. Most investors were looking at Wal-Mart in a bullish light and Abercrombie & Fitch in a bearish light. The logic being that a struggling consumer is a value-oriented consumer, and Wal-Mart is poised to meet "needs" while Abercrombie is more about "wants". It didn't seem to matter when it came to spending dollars though.

Now I'm scouring more recent earnings news, and find I have the same hang-up. Nobody has yet justified why Wal-Mart's trailing (twelve month) and forward looking (again, twelve-month) price-to-earnings ratios are both about 75% higher than Abercrombie & Fitch's. Until that happens, I don't see any drastic need to steer clear of a fashion or discretionary retailer that's doing as well.

Bottom line
On a price-multiple basis (historical or projected), Buckle, Bebe, Gap, Stage, Dick's Sporting Goods and Zumiez are all technically better values than Wal-Mart.

I'll acknowledge many of these stores mentioned fell short in one way or another...either lower earnings, or weaker same-store sales. But, when eight big retail names - none of them big on bargains or values - all beat analyst expectations, I can't help but think analysts just overshot how tight purse strings would be drawn (or how well they'd handle the adversity). Between that and results, I have a renewed interest in retailers other than Wal-Mart. (For more on evaluating these types of businesses, check out Analyzing Retail Stocks.)

Of all the stocks mentioned, Buckle seems to offer the most complete value package, and Foot Locker is an interesting turnaround story. Just know that Abercrombie & Fitch already won the value title last week.

To learn more about value investing, read Guide to Stock-Picking Strategies.

By James Brumley

James Brumley is a freelance writer and registered investment advisor. He began his career as a broker with a major Wall Street firm, where fundamentals and long-term holding periods were core strategies. After that, he switched gears completely, becoming an analyst at a short-term trading newsletter that focused on technical analysis. He now manages client money using the best of both philosophies. His company, Bluegrass Portfolio Management, offers investors an opportunity to reap superior returns with minimized risk.

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