The Best Specialty Retailers for Your Money

Damon is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Using the The Motley Fool stock screener, I sought out four of the most appealing specialty retail stocks based on the following metrics: earnings per share growth over the past three years averaging at least 20%; a Price-to-Earnings multiple below 25 times trailing-12-month earnings; a strong current ratio (CA/CL) of more than 2.0; and no long-term debt.

The companies also encompass some of the features displayed by many good retail investments. They are increasing their location count, while also growing same store sales (with one exception).

We'll start with an overview.

<table> <thead> <tr><th>Symbol</th><th>Company Name</th><th>EPS Growth Rate (last 3 Yrs)(%)</th><th>Price-to-Earnings (TTM)</th><th>Current Ratio</th></tr> </thead> <tbody> <tr> <td>HIBB</td> <td>Hibbett Sports Inc</td> <td>24.98</td> <td>20.4</td> <td>3.1</td> </tr> <tr> <td>SBH</td> <td>Sally Beauty Holdings Inc</td> <td>22.92</td> <td>22.2</td> <td>2.1</td> </tr> <tr> <td>SIG</td> <td>Signet Jewelers Ltd</td> <td>26.39</td> <td>15.9</td> <td>3.7</td> </tr> <tr> <td>VSI</td> <td>Vitamin Shoppe, Inc.</td> <td>43.23</td> <td>23.4</td> <td>2.7</td> </tr> </tbody> </table>

Sporting sales and earnings growth

Hibbett Sports Inc. (NASDAQ: HIBB) posted per share earnings of $1.00 in the quarter ended May 4, up $0.02 year over year, a performance that probably would have been better if not for cooler-than-normal weather in its geographical markets, according to management. Same-store sales have, in fact, slowed to 0.8% in the period, as compared with 6% for all of last fiscal year.

The company operated 879 stores throughout the South, Southwest, Mid-Atlantic, and Midwest portions of the U.S. at the end of the quarter, compared with 835 units at the end of the prior-year period. Its earnings per share growth has averaged 25% over the past three years, a rate apt to slow this year.

Therefore, Hibbett shares are best viewed as a long-term holding. For more on the company and the sporting goods retailers overall, see my February blog.

An attractive business model

As the largest supplier of professional beauty products in the U.S., Sally Beauty Holdings (NYSE: SBH) provides third-party branded and exclusive-label professional beauty supplies to consumers and salon professionals. It is expanding its already massive location count at a moderate rate, through both the Sally Beauty Supply and BSG channels.

The company is notable for gross margins that are trending at 49.5% in the latest quarter and improving. Profitability gains are stemming from volume increases and a more favorable mix of private-label brands. That said, same-store sales increases are trending much lower here too of late and, consequently, the pace of share-net gains is likely to cool, possibly to less-than-10% this year, from the 3-year average of 23%.

Positively, the company is aggressively repurchasing shares. The stock may thus have further momentum in the near term. Plus, given its focus on expansion of the store base at a 4% to 5% annual clip, it is a good selection to outpace the broader market over the long haul.

Capturing market share in the jewelry market

Signet Jewelers Ltd. (NYSE: SIG) is the operator of Kay, Jared, and Ultra jewelry stores. The company acquired the Ultra subsidiary in October 2012. It has been achieving impressive same-store sales gains from its core brands, allowing for an overall 10% sales gain in the latest quarter. Signet plans to expand square footage by 5% over the current year ending February 2014; this represents a reduction from the 11% increase in the last fiscal year.

All of this could support share-earnings growth of around 10% this fiscal year. The shares have had a good run over the past year, but still have solid upside at the current price.

The potential for healthy returns

Vitamin Shoppe, Inc. (NYSE: VSI) intends to open about 50 new locations this year. Along with the acquisition of 31 stores in the Pacific Northwest, the total count should be more than 660 by the end of this year. Moreover, management expects low- to mid-single digit same-store sales growth for the year.

I like the potential for further expansion of the store base, given its rapid pace of store openings since 2006 and the company's strong balance sheet. New units usually take four to five years to ramp up to reach sales levels of existing locations.

Vitamin Shoppe's shares have sold off, presenting a buying opportunity for near-term gains or long-term capital appreciation.

Takeaways

The best performing companies from an earnings standpoint historically are reviewed here. In light of weakened same-store sales trends, the first two should likely be considered mostly be patient investors with 3- to 5-year horizons. The second two stocks may delight growth investors, in light of their near-term profit prospects.

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Damon Churchwell has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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