Clothing Retailer Stocks: It’s All About Timing

Clothing retail stocks are a dicey proposition. There are three types of stock behavior. The first are stocks that catch fire, skyrocket then crash back down to earth. Chico�s FAS (NYSE:CHS) is a great example. The second type of stock starts out small, and over many years becomes a ten-bagger like Jos. A. Bank Clothiers (NASDAQ:JOSB). The third doesn�t provide the blockbuster returns of a Jos. A. Bank, but is a solid company with more modest performance.

The TJX Companies (NYSE:TJX) presently seems like a cross between Chico�s and Jos. A. Bank. The company has been around for a long time, and only recently started experiencing some terrific growth. TJX had a great quarter — sales up 11%, comps up 8%, net income up 41%. Operational cash flow was $705 million. TJX sits on twice as much cash as debt and is growing earnings at 20% this year, as well as 12% going forward. The company has a more efficient cost structure than its peers and it has a flexible pricing structure.

J.C. Penney’s Turnaround Turns Ugly

TJX does trade at 17 times earnings, so it�s a tad pricey, but the company is executing so well that it�s worth a look.

Ross Stores (NASDAQ:ROST) is experiencing the same type of growth as TJX. This quarter delivered a 26% increase in net income on a 13.6% revenue rise, and also a fab 9% rise in comps. Ross has an even stronger cash position — $750 million, the same as TJX, but only $150 million in debt. Ross is in the midst of a very aggressive expansion and so far is not missing a beat. Growth rates are about the same as TJX, and the company trades at 18 times estimates. Like TJX, Ross Stores is a discount retailer, so you could go with either of these companies.

There�s quite a difference between these two companies, which are executing perfectly, and our next two stocks.

Tiny Stein Mart (NASDAQ:SMRT) does not have the presence of its competitors and just undertook a risky plan under which it started to eliminate coupons. Its results were materially affected to the downside. Sales were flat and net income fell more than 20%.

While this news was really bad, Stein Mart presents a very interesting opportunity. The company has almost $2 per share in cash and no debt, giving it an effective stock price of $4.43 — 11.5 times this year�s earnings. Stein Mart historically had generated positive free cash flow, and if SMRT can turn its fortunes around, this might prove to be the kind of undiscovered small-cap stock that one day becomes a Jos. A. Bank.

Finally, Dan Burrows has written about J.C. Penney�s (NYSE:JCP)�struggle with its turnaround. The culprit here too was the elimination of coupons, among other things. I think part of the problem is that retailing customers expect coupons, and since J.C. Penney doesn�t have the brand value that Apple (NASDAQ:AAPL) does, people weren�t willing to just go with the program.

It is way too early to tell how this story will turn out, but speculative value players are no doubt banking on Ron Johnson�s genius and hedge fund manager Bill Ackman�s track record (his fund owns 26% of the company). If you buy into these gentlemen, J.C. Penney might prove to be on the low end of a multi-bagger.

Only time will tell.

As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities. He is president of PDL Capital, Inc., which brokers secure high-yield investments to the general public and private equity. You can read his stock market commentary at SeekingAlpha.com. He also has written two books and blogs about public policy, journalistic integrity, popular culture and world affairs.