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Navigating the Retailing Crosscurrents

Bret Jensen

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Retail is a sector I find interesting right now. The space seems to be in flux as it tries to navigate numerous crosscurrents. Consumer confidence is at a five-year high which should be great for retail stocks. However, as neither political party is really championing an extension right now, it appears that the payroll tax holiday will expire at the end of the year. This would take $120 billion annually out of consumers' pockets, and probably provide a substantial headwind -- especially at the low end of the market -- unless Congress kicks the entire can down the road for a few months while they negotiate a longer-term deal. Job growth is anemic for this point in a recovery, but we are still adding over 100,000 new jobs a month.

So judging where consumer demand is going is very challenging at the moment. My take is that the low end of the market is something I want to avoid right now due to tepid job growth and the payroll tax expiration. The luxury and mid-market sectors should do better. For my account, I am holding a couple of middle- and higher-end retailers whose stock prices have already taken their lumps. I think they have little downside should things get worse and they should do well if we manage to muddle through the next few months.

Vera Bradley VRA designs and markets stylish and functional accessories for women under the Vera Bradley brand name. I first profiled the company in mid-September when it was trading 25% lower than it is now, but I still believe the stock offers upside.

Three reasons VRA still provides value at $27 a share:

Deckers Outdoor DECK designs, manufactures, and markets footwear and is known for its iconic Ugg brand, which accounts for the majority of its revenues.

Four reasons DECK is a bargain at $31 a share:

  1. The company has good revenue growth. It is tracking to generate over 15% sales increases in fiscal 2012 and analysts project similar growth trends in fiscal 2013. The stock has a five year projected PEG of under 1 (.98).
  2. Option volume spiked massively the other day on the Dec. 30 calls, SAC Capital is still a major holder and the median price target on the stock is $32 a share.
  3. Both the Street and JPMorgan have upgraded the shares since mid-September. The stock also has a huge short interest (over 40% of the outstanding float), which means any good news could have a significant positive impact on the stock price.
  1. First of all, the shares are cheap at a little over 8x forward earnings, a significant discount to its five year average (15.0).
  2. Sheepskin is a major part of the core product line. Sheepskin prices have risen some 70% over the past two years but are starting to fall. This will have a positive impact on margins.
  3. The stock sells at the very bottom of its five-year valuation range based on P/S, P/B, P/CF and P/E.
  4. The mean analyst price target held by the 13 analysts who cover the stock is over $40 a share.