When Value Meets Growth In Retail

I recently read a news piece where the writer advised readers that a certain company's PEG ratio is 0.80 and thus undervalued by 20%. The PEG ratio is price-to-earnings divided by projected growth. Therefore, if a company's trailing P/E is 20 and its projected growth 25, it has a PEG of 0.80, just like the company above. Hindsight will dictate whether it was predictive or not. Like all ratios, it's used to compare similar companies. So too is price-to-book, a ratio often attributed to value investors. A good way to screen is to combine value (P/B) and growth (PEG), which we'll be doing in this article for apparel stores. Though it's not predictive, it provides investors with a good blend. IN PICTURES: How To Make Your First $1 Million

Apparel Stores - Value Meets Growth

Company	PEG (1)	P/B (2)	Combined (1x2)
Shoe Carnival (Nasdaq:SCVL)	1.09	0.70	0.76
Stage Stores (Nasdaq:SSI)	0.85	0.91	0.78
Stein Mart (NYSE:SMRT)	1.37	0.63	0.86
Genesco (NYSE:GCO)	0.81	1.11	0.90
Collective Brands (NYSE:PSS)	0.76	1.31	1.00

Screen Criteria
I eliminated any store with a market cap less than $100 million, and then eliminated those companies whose PEG and P/B were either below 0.25 or above 2.0. This reduced the screen from 41 down to 18. The winners are listed from lowest to highest based on their combined score (PEG multiplied by P/B) according to the stock screener. (To learn more, see Getting To Know Stock Screeners.)

It's important to remember that these screens are fallible and not always accurate. The numbers are constantly changing and I've found no screener that is perfect. They help you quickly narrow your choices. Once you have a manageable group, go to work doing your research.

Shoe Carnival Is the Winner
I don't know a whole bunch about the Evansville, Indiana shoe retailer. It has 311 stores operating in the Midwest, South and Southeast. Collective Brands, number five on the list above, is its biggest competitor along with Brown Shoes (NYSE:BWS) and Foot Locker (NYSE:FL). Despite serious competition, SCVL's first quarter was a blowout. Revenues increased 13.3% to $189.5 million, same-store sales grew 13.1% and earnings jumped 124% to $9.2 million. It achieved the best quarterly result in its history through strong comps, higher gross margins and controlling its expenses. As a result of this killer quarter, analysts have raised full-year earnings to $1.84 a share this year and $2.09 in 2011. That's a forward P/E of 9. I might not have paid attention to Shoe Carnival in the past, but small or not it's got game. Ignore it at your own risk.

Second Place

Goes To ...
Stage Stores. I wrote about it in January 11, 2010. I predicted future growth and all sorts of rosy things, and then the stock price took a dive. It's down 10% since the beginning of the year compared to negative 5% for the Wilshire 5000. I normally don't like the idea of doubling down, but if there ever were a time to do it, this is it. In June, the company raised its annual dividend 50% to 30 cents a share and produced much better comps this June (down 1.2% vs -12.6% in June 2009) despite a tough selling environment in its two biggest markets, Louisiana and Texas. This company has a great niche, serving people in small towns and with an enterprise value 3.2 times EBITDA, your down side is limited. I continue to believe the Stage is set for growth.

Bottom Line
Go and do the screen for yourself, but remove the PEG and P/B limits. I think you'll find some retailers that are far more expensive than the five I've presented today.

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!