One Clothing Retailer to Buy and Two to Stay Away From

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Within the retail sector, there are many stocks to choose from.  Industries range from discount to luxury retailers, and grocery to electronic retailers.  Even within the clothing retailers, there are several stocks that have well-known brands.  As a result, it’s important to take a discerning view towards clothing retailers.  Fashion is extremely cyclical, and in the current challenging economic environment, there are definitely winners and losers among the clothing retailers.

Down on their luck

J.C. Penney (NYSE: JCP) investors awoke to a rough day of headlines for the company recvently, as the stock cratered 15% after the company revealed fiscal fourth-quarter and full-year results.  For the quarter, J.C. Penney reported a net loss of $552 million or $2.51 per share for the quarter and a loss of $985 million, or $4.49 per share for the year.  Investors are increasingly concerned that Chief Executive Officer Ron Johnson’s vision for the company’s turnaround is not materializing.  Upon releasing results, he admitted that the company’s 2012 results were a disappointment.

Indeed, it’s clear that J.C. Penney is quickly losing favor among consumers.  Fourth-quarter total sales fell 28% versus the same quarter a year ago.  Furthermore, the company’s fourth-quarter gross margin fell almost 7 percentage points year over year.

Another clothing retailer and close competitor of J.C. Penney is Kohl’s (NYSE: KSS).  Kohl’s reported that same-store sales, a metric that includes locations open at least a year, rose only 1.9% during the fourth quarter and 0.3% for the year.  Markets were disappointed, and the company’s stock price has followed suit, losing more than 15% of its value in less than four months.  The current year’s fourth quarter actually included an extra week, meaning the company’s results would have been even worse without the benefit of an extra sales week.

For what it’s worth, Kohl’s is trading at a fairly cheap valuation.  The company is trading at a trailing-price to earnings ratio of slightly more than 10.  Along with the company’s fourth-quarter and full-year results, Kohl’s management also announced it would raise its dividend by 9%.  Kohl’s has a market-beating dividend which yields 3% at recent prices.

A winner to consider

One stock executing extremely well is TJX Companies (NYSE: TJX).  The operator of TJ Maxx and Marshall’s stores has seen its shares climb more than 20% over the past 52 weeks and are now sitting near all-time highs.  Indeed, the company’s performance has been as impressive as its stock price rally.  In February, the company reported spectacular adjusted earnings per share growth of 28% for full-year 2012, on the strength of a 12% rise in sales.

Not only has TJX’s stock soared over the past few years, but the company continues to consistently reward shareholders.   On the same day of its earnings announcement, TJX also revealed its plan to repurchase approximately $1.3 billion to $1.4 billion of its own stock during the current fiscal year, after repurchasing a total of $1.3 billion last year.

To add a cherry on top of an already fantastic annual report, TJX also intends to increase the regular quarterly dividend on its common stock to $.145 per share, or $.58 annually. This represents a 26% increase to the current dividend and marks the 17th consecutive year that TJX has raised its dividend. Over this period of time, the company’s dividend has grown at a superb compound annual rate of 23%.

Don't settle for poor performance

There are many clothing retailer stocks to consider, and as a result you shouldn’t settle on an under-performing company.  Both J.C. Penney and Kohl’s have disappointed investors lately with lackluster sales and profit performance.  In particular, J.C. Penney looks like a sinking ship.  CEO Ron Johnson likely will be struggling to turn the company around for a long time to come.

On a positive note, TJX continues to execute extremely well.  The company is seeing positive momentum in both its underlying business and its stock price.  The company is extremely shareholder-friendly, having increased the dividend for many years in a row and continuing to repurchase shares.  Investors interested in the clothing retail industry have a clear winner in the space:  TJX Companies. 


rciura 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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