Swedish clothing giant H&M Hennes & Mauritz AB
(OTCMKTS:HNNMY) launched its US e-commerce site on Thursday, two and a half years after a January 2011 tweet promised
to bring online shopping to the States. The US is a major cash cow for the brand, generating over $955 million in sales
as of May 31, which makes it the second most lucrative market after Germany. Now, with its Shop Online store, Businessweek writes
that H&M will gain entry to the $54 billion US e-commerce market of apparel and accessories.
Online shopping is a huge business in the US. Last year, according to Forrester Research Solutions, online retail sales totaled $231 billion
; the market research firm expects that number to reach $262 billion this year, reflecting an increase of 13.42% from 2012. And by 2017, the online retail market is projected to generate $370 billion in revenue.
It’s quite clear that e-commerce is a valuable asset to an apparel company. Since online sales will continue to grow in the future, we decided to look for undervalued, increasingly profitable investment opportunities within the apparel industry. We specifically focused on companies that sell garments online, with the idea that their profits will continue to rise alongside the overall online retail market.
To begin, we constructed a universe comprised of apparel stocks based in the US. We eliminated any companies that lacked an online store for their products. Next, we screened for stocks with increasing profitability as indicated by rising diluted normalized earnings per share (EPS) for the last three consecutive years. EPS refers to the amount of profit allocated to each outstanding share of common stock. Diluted normalized EPS differs from normalized EPS by taking convertible securities, such as options, warrants, and convertible preferred shares, into consideration. Consequentially, diluted normalized EPS tends to be both lower and more conservative than normalized EPS.
We then turned to one of our favorite metrics -- low Price to Sales (P/S) ratio -- to isolate the undervalued stocks. A low P/S ratio indicates that a stock’s price is cheap when compared to what the company makes in revenues. If a stock’s P/S is below 1, it can be considered undervalued. However, investors should note that this ratio doesn’t take expenses or debt into consideration, and variation between industries is normal. For this list, we screened for stocks with P/S ratios under 2, which means that the company’s market cap isn’t greater than 2x its annual sales.
That narrowed down our results to six stocks. However, three of those stocks had inventory flags, which means that the stocks exhibited faster growth in inventory than revenue year-over-year. Inventory is the portion of goods not yet sold, so faster growth in inventory than revenue is considered a troubling sign.
We were left with three stocks on our list.
Quarterly sales data sourced from Zacks Investment Research.
1. The Men's Wearhouse, Inc.
(NYSE:MW): Operates as a specialty retailer of men's suits in the United States and Canada.
Market cap at $2.02 billion, most recent closing price at $40.61.
Diluted normalized EPS increased from 1.12 to 1.34 during the first time interval (12 months ending 2011-01-29 vs. 12 months ending 2010-01-30). For the second time interval, diluted normalized EPS increased from 1.34 to 2.34 (12 months ending 2012-01-28 vs. 12 months ending 2011-01-29). And for the last time interval, the EPS increased from 2.34 to 2.56 (12 months ending 2013-02-02 vs. 12 months ending 2012-01-28).
Price/Sales ratio: 0.80.
2. Abercrombie & Fitch Co.
(NYSE:ANF): Operates as a specialty retailer of casual apparel for men, women, and kids.
Market cap at $3.91 billion, most recent closing price at $51.57.
Diluted normalized EPS increased from 2.01 to 2.14 during the first time interval (52 weeks ending 2011-01-29 vs. 52 weeks ending 2010-01-30). For the second time interval, diluted normalized EPS increased from 2.14 to 2.34 (52 weeks ending 2012-01-28 vs. 52 weeks ending 2011-01-29). And for the last time interval, the EPS increased from 2.34 to 2.91 (53 weeks ending 2013-02-02 vs. 52 weeks ending 2012-01-28).
Price/Sales ratio: 0.88.
3. Nordstrom, Inc.
(NYSE:JWN): Offers apparel, shoes, cosmetics, and accessories for women, men, and children in the United States.
Market cap at $11.98B, most recent closing price at $62.14.
Diluted normalized EPS increased from 2.01 to 2.75 during the first time interval (52 weeks ending 2011-01-29 vs. 52 weeks ending 2010-01-30). For the second time interval, diluted normalized EPS increased from 2.75 to 3.14 (52 weeks ending 2012-01-28 vs. 52 weeks ending 2011-01-29). And for the last time interval, the EPS increased from 3.14 to 3.56 (53 weeks ending 2013-02-02 vs. 52 weeks ending 2012-01-28).
Price/Sales ratio: 0.98.
Editor’s note: This article was written by Mary-Lynn Cesar, a Kapitall contributor. EPS data sourced from Yahoo! Finance. All other data sourced from Finviz.
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