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Tickers in this Article: AN, WFMI, WSM, FINL, FL
Over the long run, retailers (and, by extension, retail stocks) have the potential to do extremely well. After all, we have proven ourselves to be a nation of spenders rather than savers. However, in the near-term we should remain cautious on the sector, as it could take several quarters for consumers to return to their old habits.

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However, in spite of cautiousness, it is important to note that some retailers have actually been turning in better-than-expected earnings per share. Below are some companies screened on Monday, May 11. All of these companies have beaten expectations in their last reported quarter by more than 10%.

Company Last Q- Earnings-Actual Last Q-Earnings Estimate
AutoNation (NYSE:AN) 23 cents 16 cents
Finish-Line (Nasdaq:FINL) 36 cents 32 cents
Foot Locker (NYSE:FL) 24 cents 16 cents
Whole Foods (Nasdaq:WFMI) 24 cents 18 cents
William Sonoma (NYSE:WSM) 31 cents 16 cents


AutoNation
Although the economy remains in a state of flux, the Florida-based automotive retailer's stock price is actually trading near its 52-week high. That is a positive for the simple reason that it is likely to draw retail and institutional investor attention. Remember, investors like to jump on winners.

There are some other positive attributes that are worth noting:

  1. In spite of everything, the company is still expected to earn 94 cents a share this year. Also, according to Thomson Financial Networks, it's expected to grow 11% per annum in the next five years.
  2. With the economy seemingly on the mend, the company could see a nice sales pickup in the several quarters. That could propel the share price, too.
  3. Data shows it has beaten expectations in each of the last two reported quarters. Its ability to live up to and actually surpass expectations in those periods will allow it to garner eyeballs. Note specifically that in its most recently announced quarter it sported earnings excluding items of 23 cents, which was better than the 16 cents Wall Street analysts had reportedly been expecting. (Predicting sales growth can be something of a black art - unless you ask the right questions; read Great Expectations: Forecasting Sales Growth.)
Shares could trade north of $20 within the next 12 months, if the macroeconomic outlook continues to improve and if the company is able to hit the aforementioned estimate.

Whole Foods
The Texas-based organic foods supermarket chain had been a high flyer at one point. But times have changed. These days, the stock is more than 30% off its 52-week high. To be fair, the company did beat expectations in its last reported quarter. In addition, the estimate for the March quarter has inched up from 17 to 18 cents in the last 30 days, which could attract attention.

However, while the company's stores remain essentially a Mecca for healthy eaters, the competition has been, and will likely continue to be, difficult. For example, many supermarkets these days offer organic fare. And although the economy is making a comeback, consumers will remain quite frugal on that front, and that price will be a big factor in purchases. This may end up benefiting some of the major discounters or wholesalers.

Then there is the valuation issue. At present the company trades at about 28.2 times the current year estimate of 71 cents. I don't think that's awful, but given that the company is expected to grow its bottom line at about a 14.1% clip from 2009 to 2010, it's a bit pricey. (Learn more in our Investment Ratios Tutorial.)

The Bottom Line
Although retail is still a somewhat dangerous place to invest, there are companies out there that are exceeding expectations. One, AutoNation, deserves a closer look. The other, Whole Foods, is one to remain caution of, given its pricey valuation and what could become stiff competition over the next few quarters.

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