It was only a couple of weeks ago I was making the point that typical broadline retailers like Wal-Mart (NYSE:WMT) or J.C. Penney (NYSE:JCP) were being given more credit than they deserved.

My basic beef at the time was that the average "value" retailer's price-to-earnings metric wasn't really any better than that of what I called a "fashion" retailer. Yet, Wal-Mart, TJX Cos. (NYSE:TJX), and Kohl's Corp. (NYSE:KSS) shares were having a pretty good year. In the meantime, Abercrombie & Fitch (NYSE:ANF) and Nordstrom (NYSE:JWN) shares were going nowhere, even though their valuations were well matched against the discounters and value-oriented stores. (To read my initial analysis, check out War Of The Stores- Fashion Vs. Value.)

My question once again is, can these value retail stocks actually justify their now even-loftier prices with their current or prospective results? There are some other retail groups out there with much more attractive valuations. Yet, they're not attracting the same kind of investor traffic, or at least weren't. (For more on the most common metrics used in evaluating these kinds of stocks, check out Analyzing Retail Stocks.)

Stack 'Em Up
Perhaps my message was heard by at least some people; the stocks of the groups I was impressed by have indeed started to get results, as in price appreciation.

Check out the returns of the major Dow Jones retail industry indexes since August 22nd.

Dow Jones Industry Index Pct Chg
Since 8/22
U.S. Clothing & Accessories Index 8.31%
U.S. Apparel Retailers Index 5.65%
U.S. Specialty Retailers Index 4.85%
U.S. Broadline Retailers Index 4.46%
S&P 500 Index -1.89%
Source: Reuters as of market close September 8, 2008

These increases are great, but the question is, are they worth it? Do these stocks actually deserve to outperform the broadline names?

Though it's far from a complete measure, comparing price multiples really is the most efficient way to compare one stock against the other. So, I've gathered all the relevant data for the top five (by market capitalization) stocks for each group.

Clothing/Accessories P/E Net Profit Margin (mrq) Forward-Looking P/E
VF Corp. (VFC)
Polo Ralph Lauren (RL) 18.0 8.5% 16.5
Gildan Activewear (GIL) 17.4 14.2% 12.1
Hanesbrands (HBI) 13.1 5.3% 9.6
Warnaco Group (WRC) 36.7 3.8% 14.9
Average 20.0 7.6% 13.1
Source: Yahoo Finance As of Market Close September 8, 2008

I know the designers and manufacturers aren't actual retailers, but they are closely aligned.

Apparel Stores P/E Net Profit Margin (mrq) Forward-Looking P/E
Gap (GPS) 14.7 6.5% 13.1
Limited Brands (LTD) 12.1 4.5% 12.2
Nordstrom (JWN) 11.7 6.3% 12.1
Urban Outfitters (URBN) 31.4 12.5% 23.2
Ross Stores (ROST) 18.3 4.3% 15.5
Average 17.6 6.8% 15.3
Source: Yahoo Finance As of Market Close September 8, 2008
Specialty Retail, Other P/E Net Profit Margin (mrq) Forward-Looking P/E
Staples (SPLS) 18.1 3.0% 14.7
Luxottica Group (LUX) 18.2 10.3% 14.9
Ultrapar (UGP) 20.4 1.5% 10.1
PetSmart (PETM) 19.6 3.0% 16.5
Office Depot, (ODP) 9.9 -0.1% 11.6
Average 17.2 3.5% 13.5
Source: Yahoo Finance As of Market Close September 8, 2008

Finally, have a look at the more value-oriented department stores.

Department/Discount Stores P/E Net Profit Margin (mrq) Forward-Looking P/E
Wal-Mart (WMT) 18.1 3.4% 16.1
Target (TGT) 16.4 4.1% 15.0
Costco Wholesale (COST) 24.2 1.8% 21.0
Family Dollar Stores (FDO) 17.7 3.8% 16.3
Dollar Tree (DLTR) 16.9 3.4% 15.3
Average 18.6 3.3% 16.7
Source: Yahoo Finance As of Market Close September 8, 2008

Value Companies Short on Value, Again
The data speaks pretty clearly; the smaller stores are indeed deserving of their recent gains. Over the last twelve-months, and looking forward to fiscal year 2009, the value-oriented department/discount stores' stocks are actually more expensive with the lowest average profit margin and a high average trailing and forward P/E, even counting the recent gains for the other groups. (Take a look at how this effective ratio can be influenced by certain critical factors in Use Price-To-Sales Ratios To Value Stocks.)

This reality has been overlooked by most of the market commentators who insist that consumers are pinching pennies and are unwilling to splurge. Perhaps directly comparing the valuations will drive the point home. Either way, I'm just glad the rest of the retailers are finding investor favor again.

Bottom Line
I still contend these "fashion' and "brand name" stocks are the better ones to be holding as we come out of a recession. And, given their new-found strength, I have to think their rally is a predictive sign that we are getting close to doing just that.

Related Articles
  1. Stock Analysis

    Allstate: How Being Boring Earns it Billions (ALL)

    A summary of what Allstate Insurance sells and whom it sells it to including recent mergers and acquisitions that have helped boost its bottom line.
  2. Options & Futures

    Cyclical Versus Non-Cyclical Stocks

    Investing during an economic downturn simply means changing your focus. Discover the benefits of defensive stocks.
  3. Investing Basics

    How to Deduct Your Stock Losses

    Held onto a stock for too long? Selling at a loss is never ideal, but it is possible to minimize the damage. Here's how.
  4. Economics

    Is Wall Street Living in Denial?

    Will remaining calm and staying long present significant risks to your investment health?
  5. Stock Analysis

    When Will Dick's Sporting Goods Bounce Back? (DKS)

    Is DKS a bargain here?
  6. Investing News

    How AT&T Evolved into a Mobile Phone Giant

    A third of Americans use an AT&T mobile phone. How did it evolve from a state-sponsored monopoly, though antitrust and a technological revolution?
  7. Stock Analysis

    Home Depot: Can its Shares Continue Climbing?

    Home Depot has outperformed the market by a wide margin in the last 12 months. Is this sustainable?
  8. Stock Analysis

    Yelp: Can it Regain its Losses in 2016? (YELP)

    Yelp investors have had reason to be happy recently. Will the good spirits last?
  9. Stock Analysis

    Is Walmart's Rally Sustainable? (WMT)

    Walmart is enjoying a short-term rally. Is it sustainable? Is Amazon still a better bet?
  10. Savings

    The Worst Financial Problems Ultra-High-Net-Worth-Individuals (UHNWIs) Face

    Understand how the problems of ultra-high-net-worth individuals (UHNWIs) are different from ordinary problems, and identify the unique financial challenges they face.
  1. Which mutual funds made money in 2008?

    Out of the 2,800 mutual funds that Morningstar, Inc., the leading provider of independent investment research in North America, ... Read Full Answer >>
  2. Do interest rates increase during a recession?

    Interest rates rarely increase during a recession. Actually, the opposite tends to happen; as the economy contracts, interest ... Read Full Answer >>
  3. What are the risks of annuities in a recession?

    Annuities come in several forms, the two most common being fixed annuities and variable annuities. During a recession, variable ... Read Full Answer >>
  4. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  5. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  6. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>

You May Also Like

Trading Center