3 Retailers to Buy in 2013


Santa may have gone back to the North Pole until next year, but I'm always making lists and checking them twice to find out which companies have been naughty and nice. With our calendars ready to roll over to the new year, it's time we take a closer look at the retail sector.

Whether we go headfirst, kicking and screaming, over the fiscal cliff or a deal gets done, I want to look at three retailers you can buy without fear in 2013 because they should be set for an S&P 500-trouncing year.

American Eagle Outfitters
I've said it before and I'll say it again: American Eagle has the perfect blend of upscale and discount pricing, as well as the hot fashion trends that teens and 20-somethings are looking for nowadays. Despite a hiccup or two now and then, American Eagle has done a remarkably good job of managing inventory levels and it's done a great job of getting first-time spenders to open up their wallets in its stores. The same can't be said for low-end discounter Aeropostale which has had to offer steep discounts to move its merchandise because it couldn't figure out its inventory issues if its existence depended on it, and Abercrombie & Fitch which has predominantly priced itself out of the teen self-buyer market and has been crushed by weakness in Europe.

Furthermore, American Eagle has $545 million in cash with no debt on its balance sheet, giving it the flexibility to expand using just cash on hand and free cash flow. Consider the company's 2% yield just icing on the cake!

If I had my choice of standing between an 800-pound gorilla and the front door or between any one of my female friends with a credit card and the front door of DSW, I'd say bring that gorilla on! The allure of DSW is unparalleled among female shoppers who are looking for a great deal on footwear. The company's push into accessories like jewelry in its stores, as well as its growing online presence, which now has it selling luxury brands online, should be the driving force that pushes margins higher yet again in 2013.

DSW, if you recall, actually boosted its EPS forecast multiple times in 2012, and we could be in for much of the same in 2013. The footwear retailer plans to open between 25 and 30 new stores this coming year on the heels of opening 39 stores this year. DSW also yields a moderate, but not unappreciated, 1%. Keep your expectations realistic and I feel DSW will be a nice surprise to investors in 2013.

Even with the prospect of higher taxation for upper-income earners regardless of whether a fiscal cliff deal is agreed upon in Congress, Nordstrom appears set to prosper thanks to its long-term vision and proactive management team.

In recent years, Nordstrom has abandoned hefty delivery charges and invested heavily in its direct-to-consumer division with the hope that the convenience of shopping online would trump a drop in consumer spending -- amazingly, Nordstrom's strategy has been spot-on. Investments aimed at improving its stores' IT, as well as introducing higher-margin premium merchandise while keeping sales scarce (just twice a year), is a strategy that's worked with consistency for Nordstrom. In 2013, don't be surprised if Nordstrom is one of the few luxury retailers not to feel the pinch of tightening consumer spending thanks to its direct-to-consumer investments in previous years. And of course, you'll get a nice 2.1% yield as well!

The other side of the coin
Stay tuned for this article's sequel, where I reveal the three retailers I'd avoid like plague in 2013.

And if you're looking for some more top picks in this sector for 2013, check out our special free report revealing the 3 Companies Ready to Rule Retail. Uncovering these stock picks is free today; just click here to read more.

The article 3 Retailers to Buy in 2013 originally appeared on Fool.com.

Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.