2 Retail Stocks to Buy and 1 to Avoid
It's the perfect time of year to consider retailer stocks. The holidays are in full swing, and investors are understandably focused on how good the fourth-quarter shopping season will turn out to be. However, not all retailers are created equal. The economy is still difficult for many, and the labor market continues to sputter along at a tepid rate.
While the 2013 holiday shopping season will be bright for some retailers, a few will be left out in the cold. Here are two retailers that should see their financial fortunes improve in the fourth quarter, and one that may disappoint.
High-end doing well
As the saying goes, the rich get richer. Nowhere is that more apparent than in the retail space, where many high-end retailers are forecasting strong fourth-quarter results. Specialty apparel and accessories retailer Fossil has seen business conditions improve through the first three quarters of 2013 and is expecting a solid close to the year. Fossil grew revenue and earnings per share by 15% and 26%, respectively, through the first nine months of the year.
In addition, Fossil sees a strong fourth quarter that should make 2013 a great year overall. Management expects at least 6% growth in net sales in the critical holiday quarter. For full-year 2013, management advises investors to expect at least 12% growth in net sales. Success will be due in large part to the company's aggressive emerging-market growth potential. Asia-Pacific sales rose 13% in the third quarter.
Athletic apparel provider Foot Locker is also a great retailer to consider. That's because Foot Locker trades for just 15 times trailing earnings and offers investors the added protection of a 2% dividend yield. Foot Locker might seem like a classic value play, but that doesn't mean it can't offer investors growth as well.
Foot Locker's sales are up 5.5% through the first three quarters, and its earnings per share have grown 7% in the same period. Going forward, the company expects strong results to continue. Foot Locker opened 28 new stores in the third quarter and remodeled an additional 118 stores. Moreover, Foot Locker is opening new stores aggressively across the globe, where growth opportunities remain attractive. The company added 212 international locations in the third quarter compared to the same period last year, and that figure should only increase in the future.
This retailer may miss the target
While the high-end corner of the retailing space is doing well, the low-end continues to struggle. That's because the low-end consumer is still hurting from the massive damage caused by the recession, and hiring remains tepid. This means discount retailers are forced to offer significant promotions to woo customers. One such retailer is Target , which has its own share of particular problems heading into 2014.
Target expects to earn between $1.50 and $1.60 in adjusted EPS in the fourth quarter, which would actually be a decline from the fourth quarter last year, when it earned $1.65 per share. Target is facing significant pressure in many of its key strategic initiatives. Its Canada expansion isn't gaining as much traction as it would like, and its hefty discounts are coming at a cost to margins. Gross margin contracted in the third quarter, which should concern investors going forward.
Target was also the victim of a major security breach, and it revealed that information from as many as 40 million credit and debit cards was stolen by hackers. Not surprisingly, shares of Target have declined recently, and it may be too soon to declare the end of the sell-off.
The Foolish conclusion
With economic growth accelerating and consumers feeling better about themselves, it's easy to build a strong case for retail stocks. At the same time, not all retailers are created equal. It's critical for investors to separate the winners and losers in retail. After all, the economy is still difficult for many, meaning there's a limit on how much (and where) consumers will spend this holiday shopping season.
As a result, investors interested in the retailers set to thrive this holiday shopping season should consider Fossil and Foot Locker, but would be wise to avoid Target until its underlying problems are resolved.
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The article 2 Retail Stocks to Buy and 1 to Avoid originally appeared on Fool.com.
Fool contributor Bob Ciura has no position in any stocks mentioned. The Motley Fool recommends Fossil. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.
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