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Tickers in this Article: SSI, WMT, TSCO, M
Exactly one year ago, I brought to the attention of readers the Yonder 40, a stock index that reflects the rural economy. I reasoned then, as I do today, that small towns are a great place to invest. The contrarian in me loves the fact that most people in America have written off rural America as an antiquated place to live and doomed to extinction. Zigging, when the markets are zagging, brings great potential to make you money. One company that should meet this challenge is Stage Stores (NYSE: SSI), the Houston-based department store chain. Up 50% in 2009, it won't fly under the radar too much longer.

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Seasoned Pro At The Helm
CEO Andrew Hall came to Stage Stores in 2006, as COO, after 12 years with May Department Stores. He left after Foley's, the Houston-based chain where he was chairman, was bought by Macy's (NYSE: M) in 2005. The head office moved to Cincinnati while Hall opted to stay in Houston. Stage is lucky he did. Since then, he and the rest of the executive team have continued to remake the small town retailer. Once the economy is back on its feet, it should experience some of its best years ever.

No Real Competition
Because Stage focuses on small towns of 8,000 to 10,000 with another 50,000 within 10 miles, it faces little competition from traditional retailers. Hall himself knew little about Stage when he worked at Foley's, even though both companies were based in the same city. Today, he's a firm believer that Stage truly meets the needs of an underserved community. Crazy as it might sound, with 758 stores at present and plans for up to 1,000 by 2014, Hall would love to locate almost every one of the 241 expected new stores in regions where they can compete with Wal-Mart (NYSE: WMT), which is an incredible drawing card. Better yet would be locating them between Wal-Mart and Tractor Supply (Nasdaq: TSCO), another complimentary, rather than competitive, retailer operating in rural communities. Five-Point Plan
Stage believes five things will make a difference in its immediate future. These include:

  • Taking advantage of the Goody's trademark that it acquired for $300,000 last July by using the name to open stores in areas where the now-defunct department store chain was popular.
  • Strengthening its merchandising plan and, in the process, increasing sales and lowering markdowns.
  • Improving the customer experience by emphasizing the price/value relationship.
  • Continuing to benefit from the north/south realignment that took place last June, which created two separate buying offices and a more regionally appropriate product offering.
  • Maintaining a strong financial position by controlling expenses, avoiding long-term debt, generating positive free cash flow and hanging on to its cash.
Stock Price Saw A Lot Of Appreciation In Past Year
Recently, Stage announced its December same-store sales were down 2.2% versus a decline of 4.9% a year earlier. Full-year earnings per share will be around 69 cents, which isn't half bad considering it is sporting a 7%-plus decline in same-store sales for the year. In 2008, Stage's stock was trading below $5. Today, it's trading around $12.50. That's a lot of appreciation in just one year. However, if you look at its five-year chart, you'll see that with the exception of its drop at the end of 2008, it has historically traded higher than where it's sitting today.

Yes, revenues and earnings are off from past years, but that's true for many retailers. Further, if you compare Stage with Morningstar's Small Cap benchmark index over the past five years, Stage severely underperformed its small cap brethren to the tune of 40%. In addition, its price-to-cash, price-to-book and price-to-sales ratios are all below historic averages.

Bottom Line
Add all this together, and I believe the stage is set for future growth. (For a review on financial ratio analysis, refer to Fundamental Analysis - Analyzing Using Financial Ratios.)

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