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This week we are running a screen to identify the top-performing retail stocks so far in 2013. Retailers are well represented in the Value Line Investment Survey, accounting for about 8% of the 17,000 companies we follow. We divide these roughly 130 issues among six industries: Retail Automotive, Retail Building Supply, Retail (Hardlines), Retail (Softlines), Retail Store, and Retail/Wholesale Food.

As a group, retail stocks have performed modestly better than the broader market so far in 2013. The median year-to-date total return (through July 31st) for these equities was nearly 25%. By comparison, the S&P 500 Index advanced 19.6% over this same stretch (excluding dividends), while the broader based Value Line Arithmetic Index was up 24%. As is usually the case, there are a handful of retail issues that have produced recent returns far in excess of their industry peers and the broader market, as a whole. A list of the ten best performers can be found at the end of this page.

Most of the companies that made the list, starting with the top three of ValueVision Media (VVTV), SUPERVALU (SVU), and Pacific Sunwear (PSUN), have encountered hard times in recent years, and investors, at least for now, appear to be feeling more sanguine about their ability to get back on track. Still, these turnaround stories remain subject to considerable risks, and their respective stocks will likely remain subject to wide price swings for some time to come. Of the ten stocks cited above, only GameStop Corp. (GME) gets an above-average score (60 on a scale from 5 to 100) for Price Stability, while four others, ValueVision, Pacific Sunwear, Nautilus (NLS), and Zale Corp. (ZLC), get our lowest score of 5.

Below, we take a closer look at Zale Corp. shares to get a better sense of the risks and potential rewards investors could expect to encounter when taking a position in this oft-delayed turnaround story. 

Zale Corp. is the nation’s largest chain of specialty retail jewelry stores. The company was founded in 1924 and now operates roughly 1,700 stores and kiosks, which are located in shopping malls throughout the United States, Canada, and Puerto Rico. Its operations include Zales Jewelers, Zales Outlet, Gordon’s Jewelers, and Piercing Pagoda.

The company’s operating performance deteriorated badly during the recession, and it has struggled in the intervening years to get back on track. (Incidentally, hard times are not new to the jeweler, which went through a stint in bankruptcy during the early 1990s.) In all, revenues are off about nearly 25% since their fiscal 2007 peak and the bottom line has finished in the red in each of the past four years. (Fiscal years end on July 31st.) The company’s business is geared heavily towards the holiday season. It typically generates at least 35% of its annual revenues and virtually all of its profits during the January quarter.   

Zale’s standing as one of the top performing retail stocks of calendar 2013 can be traced largely to its April-quarter earnings report. Prior to that, ZLC stock was having a rather uneventful year, but it shot up 22% on the day results were released and has continued to push higher in the subsequent two-plus months. The company’s top-line performance was unexciting, with revenues showing little change from the prior-year period. The bottom line, though, improved considerably, as the jeweler earned $0.13 a share, the first time Zale’s has turned a quarter profit outside the January interim since 2007. The improvement suggests that restructuring efforts, including closing underperforming stores and upgrading the product mix, are finally beginning to gain traction. Results are also getting a boost from lower interest expense, reflecting debt refinancing undertaken last summer. Given these results, Zale’s stands a good chance of showing a small profit in the fiscal year just concluded, and we expect earnings to remain on rebound in fiscal 2014, with share net reaching $0.40.

Momentum-oriented investors with a healthy tolerance for risk will undoubtedly want to take a closer look here. For most others, however, we think the risks currently outweigh the rewards. For starters, these shares carry our Lowest rank (5) for Safety, reflecting the company’s heavily leveraged balance sheet and erratic stock price. Granted, the stock is still a long way from its pre-recession high of more than $40 a share, but we don’t expect it to be revisiting these heights within the next 3 to 5 years. One concern is rising competition from online jewelers, such as Amazon.com (AMZN) and Blue Nile (NILE). The battle for market share with these and other competitors will likely make it difficult for operating margins or profits at Zale’s to reach their previous high-water marks, at least through 2016-2018. Too, the 11 million warrants (exercisable at $2 a share) issued to Golden Gate Capital last year, which helped to secure more favorable interest rates, will likely be modestly dilutive to earnings over the long term. 

 

Company  (Ticker)  

Industry Name   

Total Return YTD

ValueVision Media (VVTV)  

Retail (Hardlines)   

238.90%

SUPERVALU INC. (SVU)  

Retail/Wholesale Food 

226.7

Pacific Sunwear (PSUN)  

Retail (Softlines)   

164.2

Best Buy Co. (BBY)  

Retail (Hardlines)   

156.1

Nautilus Inc. (NLS)  

Retail (Hardlines)   

150.1

Zale Corp. (ZLC)  

Retail (Hardlines)   

126.3

Conn's, Inc. (CONN)  

Retail (Hardlines)   

103

Stein Mart (SMRT)  

Retail Store    

94.6

Big 5 Sporting (BGFV)  

Retail (Hardlines)   

91.5

GameStop Corp. (GME)  

Retail (Hardlines)   

80.5

Green Mtn. Coffee (GMCR)

Retail/Wholesale Food 

78.5

Lumber Liquidators (LL)  

Retail Building Supply 

75.8

 

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.