The housing bubble has burst, consumers are overleveraged, subprime mortgages are imploding,
hundreds of billions of adjustable rate mortgages are about to reset.
This doesn't feel like the time when you want to own retailers, right?
The answer is simple, depending on valuation. The retail sector has faced quite a selloff over last couple weeks as investors (for the right reasons) grew increasingly concerned with all the above issues.
Separating a good company and a good stock is the first thing anyone should learn when plowing into the investment world. Certainly, retail business will face hard times ahead. But in many cases the worst case scenario has been priced into the stocks.
My favorite stock in the sector is Jos. A. Banks (JOSB), a retailer of men's clothing.
In recent weeks the stock came down from mid $40s to $30 a share, putting its valuation at about 10 to 12 times earnings (depending on the time period you want to use for "E"). Economic slowdowns are not good for retail in general, but not all retailers are created equal.
Jos A. Banks is catering to a higher end demographic. The household income of its customers is well into six figures. Thus any economic slowdown should have a reduced impact on their shopping habits. Also unlike big ticket item retailers Best Buy, Jos. A. Banks' customer are less likely to finance their purchases by leveraging their house.
Under new management the company has embarked on fairly aggressive expansion strategy, more than half of its stores are less than three years old. As young stores mature their same-store sales and profitability increases, creating a profitable tailwind behind the company.
Last year investors (mistakenly) hated the stock because of company's unorthodox inventory strategy -- JOSB has grown inventory to levels of twice of their nearest competitor's Men's Warehouse. Despite Wall Street's cold reception that strategy has paid off as it lead to increase in same-store sales, higher margins and return on capital.
The good news, since late 2006 inventory growth has been lagging sales, management indicated that it is happy with its current inventory levels.
To add fuel to the fire, July same-store sales disappointed investors as they were down 6.4%, compared with expectations of a 1.4% decline. However, the monthly same-store sales have proved to be very volatile and are not predictive of what is to come due to the company's varied marketing strategies. Also, this July company faced tough comparison with 15.9% same store sales gains in July 2006.
There is no question that an economic slowdown will shave several percentage points of intermediate growth from the company. However, the current valuation prices in no growth at all -- an unlikely scenario.
My firm and I own the stock!
Vitaliy Katsenelson, CFA is a portfolio manager at Investment Management Associates. His book "Active Value Investing" will be published by John Wiley & Sons this month.