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.

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