Little Black Dress Stocks You Should Buy Now

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

Every woman needs a perfect little black dress, like the one worn by Audrey Hepburn in Breakfast at Tiffany's: a dress that can be accessorized up or down, comfortable, fashionable yet not faddish.

The Little Black Dress, or LBD as it's known to fashion writers, is such a core item in women's retail that Kristin Bentz, former star retail analyst, uses it as a tell for retail stocks, and if a retailer cuts prices on this core offering before Christmas she red flags the stock.

A portfolio needs its own version of a little black dress: a core holding to hold forever. Several names come to mind, particularly some Dividend Aristocrats, companies that have consistently raised their yield for 25 years plus. Yield looks good on anyone's portfolio. Some fashion-related names that fit the bill are Target (NYSE: TGT), Wal-Mart (NYSE: WMT)...yes Wal-Mart!, and VF Corp (NYSE: VFC).

Fashionable but not faddish

Target has become the more fashionable big box retailer with its history of collaborations with hot haute designers. In the fall a Phillip Lim line will debut at Target that will cost 50-90% less than regular retail. Recent collaborations with apparel designers Kate Young and Prabal Gurung and celebrity Justin Timberlake have done well. These successes have prompted Macy's, J.C. Penney, and Kohl's to feature designer collaborations.

As a retailer for the whole family it localizes merchandise to reflect geographic preferences and has introduced City Target stores, their downsized version of the suburban big box, to five major cities and their apartment dwellers this year. These stores have been quite the success, leading Fast Company magazine to include Target in its top ten list of most innovative companies for 2013.

Competitor Wal-Mart, also a Dividend Aristocrat, is the world's biggest retailer and the number one name in the National Retail Federation's 2012 STORES Top 100 list of retailers with the highest US sales at $328.7 billion. But Target coming in at number 3 (with sales of $71.9 billion), behind Kroger, had more sales growth at 5.1% than Wal-Mart at 4%.

Target trades at a 16.86 trailing P/E with a 2.40% yield at a 32% payout ratio. The dividend has grown at a 23.39% rate over the last three years. The stock has slightly underperformed the S&P 500 up 22% this last year.

The only thing I don't like about Target is its high CEO compensation for Gregg Steinhafel, which raises its corporate governance risk score to 6 when otherwise it would be a low 1 or 2.

As a retailer Target is more innovative and upscale. Their omnichannel initiatives are ambitious with a recent competition to create a Target shopping app chronicled in The New York Times. Target now has free Wi-Fi in all stores and their e-commerce and mobile sales growth is outpacing its big box competitors.  

It is expanding in Canada with 48 stores there aiming for 100 by year-end and 1,784 US stores. Sales per square foot have been growing from the low of $287 in 2008 to $299 for 2012 but have yet to return to the high of $318 per square foot of 2007. Analysts see 11% EPS growth going forward.

This collaboration theme is going so far as to include rival Wal-Mart. Target has entered into a consortium of big retailers with Wal-Mart for a mobile wallet payment plan to rival Square and eBay's PayPal.

The biggest big box

Wal-Mart itself has partnered up with American Express to offer Bluebird, a checking and debit card alternative for  millions of Americans who don't have checking accounts and need basic banking service.

Wal-Mart is a global brand, 10,800 stores in 27 countries, with pricing power and a tough negotiator with suppliers. Recent cuts in staff at the stores have led to widely publicized shortages on the shelves, despite having over 2 million employees.

Wal-Mart is trading at a trailing 15.10 P/E with a 2.50% yield at a 33% payout ratio. The company operates in three divisions: Sam's Club, Wal-Mart U.S., and Walmart International. The corporate governance risk score of 1 is the lowest (best).

The stock has underperformed this last year, only up 6.60%, seriously lagging Target. Its PEG at 1.56 is not that much worse than Target at 1.4. Analysts see 9.29% five year EPS growth.

Alternative to the big boxes

Dividend Aristocrat VF Corp is an apparel manufacturer with five main brand divisions: workwear (uniforms), outdoor & action sports wear, jeanswear, VF imagewear, and contemporary comprising 35 different brands including popular names like Timberland and Vans.

7 For All Mankind jeans is one of VF Corp's most successful brands. VF Corp's biggest threat is the abundance of competitors for all its different brands, especially heritage denim brands, Lee and Wrangler. There's also competition for VF Corp's most successful brands, the Outdoor and Active Sports lines, like privately held Patagonia, Columbia Sportswear, etc.

VFCorp is moving into Asia Pacific in a big way with VF Corp targeting $2 billion in revenues by 2017. Globally, its five-year plan aims for $17 billion in revenue and EPS of $18.00 by then. It's ramping up direct-to-consumer e-commerce, expecting a 2% bump up in DTC sales this year.

The stock touched a multiyear high of $200.34 this week for a gain this last year of 46.27%, more than double the S&P 500's and Target's gain. After this run-up valuation is somewhat stretched, but not badly at a 1.69 PEG and a forward P/E of 16.15. It offers a 1.80% yield at a 31% ratio. Last October they raised the yield by 21%.

The company has grown by strategic acquisitions like Timberland and has an interest in distressed Billabong, which it could buy at closeout prices.

Analyst sentiment remains bullish overall with six Strong Buys, seven Buys, and seven Holds. The stock is close to its median price target of $203.50.

Which LBD to buy

VF Corp has been the best performer, and its five-year growth plan is ambitious but doable according to Fellow Fool Andrew Marder. Its strategic acquisitions have done well and growth looks good. One can only hope this LBD goes on sale.

Although Wal-Mart is the winner on yield and value its stock has underperformed. Target simply has better growth and innovation. Target's Canadian growth, designer collaborations, and City Target stores are compelling reasons to buy this  versatile LBD.

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AnnaLisa Kraft 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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