Because it seems the average consumer has become much more upbeat over the last several months, I think the outlook for the retail sector - almost across the spectrum - has improved tremendously. But that doesn't mean that I think all stocks in this space could see upside. With that in mind, let's take a closer look at casual apparel retailer Pacific Sunwear (Nasdaq: PSUN).
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Time For A PacSun Fitting?
The California-based company has seen its stock bounce nicely off its lows earlier in the year. It's also safe to say that the company's wares remain fairly popular among the younger generation. Finally, this past week Adrienne Tennant of FBR Capital Markets reportedly upped her rating on the company from Market Perform to Outperform. She also upped her price target.
But at the end of the day I want to see this company generate profits, or have the sense that profits are about to be realized, before punching this ticket. As things stand now, PacSun is expected to lose 67 cents this year and 31 cents next year, which isn't too inspiring. And data on Yahoo Finance indicate that over the last two months or so, the estimate for this year and next year has actually gone down.
For the record, the company is expected to lose 20 cents a share in its third quarter. And I think it could actually beat that number. (It has beaten expectations in every one of the last four quarters, according to data on that aforementioned source.) But again, whether it beats or not, those expected yearly losses are scaring me off.
In addition, with the economy and consumer spending apparently improving, wouldn't it make sense for insiders to be buying stock in the open market? I think so. But there hasn't been a lot of activity on that front as of late, which makes me wonder why I should be buying in.
Other Retailers Worth A Mention
I suppose to PacSun's credit, the shares make more sense than Abercrombie & Fitch (NYSE: ANF), which is expected to be profitable, but which trades at more than 40 times this year's estimate.
However, if given the choice I'd much rather try American Eagle (NYSE: AEO) on for size. It's not cheap at 25 times this year's estimate, but it has met or beaten analyst expectations in each of the last four quarters (according to that same source), and it's trading near its 52-week high, which could attract a lot of attention.
Finally, while some don't lump in discounters with the company and/or don't consider them primary competition, I do think that some consumers may bypass PacSun and instead check out their local Target (NYSE: TGT) store. Target excites me, and I think there could be plenty of upside from its current $50 per share. It trades at 16 times this year's estimate.
Bottom Line
Even though PacSun's stock is trading at levels well below several years ago, I don't think it makes sense to try bottom fishing. The expected losses and the better deals I see in the space will keep me on the sideline. (For more, see Analyzing Retail Stocks.)
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