5 Retail Stocks Set for a Comeback

After an extended period in the wilderness courtesy of one of the most severe economic downturns in decades, retail stocks are slowly making a comeback. Just a couple of years ago, consumers shunned clothing and many other goods for more basic necessities. Consumers traded down where they could and even the wealthiest of individuals held back on luxury purchases.

Now, however, consumer confidence is steadily increasing and is being reflected in jumps in year-over-year sales trends at stores. Given that share performance mirrors company fundamentals over the long haul, the stocks of leading retailers should soon see outsized gains and could prove particularly profitable for investors.

Here are five stocks that cover a wide spectrum of investment themes, including growth, value, growth-at-a-reasonable-price (GARP), income and buyout potential. All of them stand out for their upside potential.

Nordstrom (NYSE: JWN)
Business: Upscale Department Store Operator
Forward P/E: 13.0

Shares of Nordstrom have recently run up, but they still trade at a reasonable forward P/E of less than 15. The stock is appealing given Nordstrom’s expansion opportunities and ability to stand out in a crowded retailing landscape. It operates only a couple of hundred stores that consist of 115 namesake, upscale stores, and 82 Nordstrom Rack stores that are considered discount stores and a means to clear excess inventory from the higher-end stores.

This small store base gives Nordstrom plenty of room to expand. And though it is more of a department store, it sells merchandise that appeals to a younger crowd and really caters to its customers to keep them coming back. Same-store sales are rapidly growing along with the economy, and should help profits grow in the double digits for the foreseeable future.

Business: Specialty Apparel Retail
Forward P/E: 9.7

Gap’s historical growth trajectory was impressive, as it became one of the largest specialty apparel retailers in the world. But in the past decade, its focus on basic dress stopped resonating with consumers and sales have been roughly flat since. But in the past few years, management has found a way to cut costs and leverage weak top-line trends into steady profit growth and using excess cash flow to buy back stock and boost earnings.

At a forward P/E of about 10, the shares are a bona fide value play and should be of interest to anyone that thinks sales will eventually improve at any of its three retailing concepts of Gap, Banana Republic and Old Navy. Its 2.2% dividend yield is decent, too.

Macy’s (NYSE: M)
Business: Mid-market Department Store
Forward P/E: 11.4

Macy’s acquired its way into one of the largest department store chains in the country. It now operates 850 stores, but has been criticized for acquiring regional chains, such as Marshall Field’s, and stripping them of their storied names and local merchandise know-how. A shift in strategy has decentralized store buying to front-line managers and appears to be rejuvenating sales. This coupled with an economic recovery is helping sales and profit trends stand out from the competition. A forward P/E below 12 and the ability to post above-average earnings growth means the stock could be appealing for investors wanting to buy growth at a reasonable price.

The Buckle (NYSE: BKE)
Business: Specialty Apparel Retailer
Forward P/E: 11.8

Nebraska-based The Buckle operates more than 400 mall-based apparel stores and has stood out for an almost uncanny ability to know what fickle teens find fashionable and are likely to purchase. The stated current dividend yield of 2.6% is decent, but what makes it an appealing income play is that it occasionally pays out a special dividend, which it has in each of the last three fiscal years — and all have exceeded more than $1 per share. A forward P/E below 12 is also appealingly low.

JC Penney (NYSE: JCP)
Business: Mid-market Department Store
Forward P/E: 26.1

It recently came to light that two prominent activist investors, billionaire hedge fund investor Bill Ackman and real estate investment trust Vornado Realty (NYSE: VNO), had acquired sizeable stakes in department-store retailer JC Penney. Earlier this decade, Penney’s, as the company is also known, had embarked on a restructuring campaign to lower costs and boost sales. This strategy was quickly derailed by the recent economic downturn, and the company is just beginning to see sales and profits recover. The company’s valuation, as evidenced by a forward P/E of 26, is ahead of where the operating fundamentals are right now. But a current dividend yield of 2.5% and interest from Ackman and Vornado suggest the stock may have further upside from current levels.

Action to Take –> Each stock above has its own unique appeal, but The Buckle stands out in my mind due to a combination of a low P/E, appealing yield and management’s reputation for its retailing prowess. Like Nordstrom, it also has a small store base that it can expand for many years to come. Gap is also appealing, as the downside is limited, given the massive amounts of cash flow the company generates, while upside exists with just a modest improvement in the top line.