The Consumer Stock Network

This week, we continue with our list of favorite consumer stocks. Given the significant number of headwinds facing consumers right now (record-high gas prices, declining home values and the corresponding "wealth effect," as well as lingering credit concerns), we concede that this space may not be appropriate for all investor classes in at the present time. That being said, we still believe there are a number of compelling investment ideas to be found in this sector.

Instead of a long-winded recap of the names, we've decided to release the names one-by-one and provide a brief summary. After we finish revealing our favorite stocks, we will pull together the list into an equal-weighted portfolio and compare our performance to a number of benchmarks over the next year. We may also adjust the list periodically, as there may be better investment opportunities that arise in the coming months.

Today, we add teen-oriented apparel retailer The Buckle (NYSE: BKE) to the list.


Investment Highlights

• Under the radar stock. In our opinion, The Buckle's stock doesn't garner the same attention that other mall-based competitors such as Aeropostale (NYSE: ARO), American Eagle (NYSE: AEO), Abercrombie & Fitch (NYSE: ANF), J. Crew Group (NYSE: JCG), and The Gap (NYSE: GPS) do. One reason for this is the company's relatively small market cap ($1.5B compared to the peer group average of about $3-$4B), but with virtually no stores in the Northeast US, it is easy for the Street to overlook the company (in fact, there are only a handful of analysts covering the stock). Buckle stores are often located in secondary and tertiary markets where there are only a limited number of apparel options for a fashion-starved audience - a key reason behind the company's excellent sales trends as of late. As awareness of Buckle increases, we expect institutional shareholders to gravitate toward the stock and move its price upward.
  
• Appropriate brand name/private label merchandising mix. The company employs a dual-merchandising strategy, where 70% of the assortment are brand names highly sought by the teen audience (Lucky Brand, Hurley, Affliction, Guess, Quiksilver/Roxy, among others) and the remaining 30% represents in-house private label brands. The brand name items drive customers to the stores, while the private labels represent a key margin driver. While we would prefer a bit higher proportion of the private label brands, similar merchandising strategies have worked for the top mall-based apparel retailers in the past.
• Costs well controlled. Instead of costly marketing programs, The Buckle keeps its advertising expense budget to about 1% of total sales (compared to 3%-4% for some other national retailers) and allows its reputation for quality rand-name merchandise to drive traffic. When a company can still generate sales growth in the low 30% range (as The Buckle did in 1Q08) with minimal marketing costs, it has a profound effect on the bottom line. Furthermore, the minimalist approach to advertising frees up capital to be used on other important matters, such as inventory management and distribution.
  

Investment Risks

• Rising production costs. Most apparel and footwear retailers are feeling the negative impact of rising Chinese labor costs as well as higher input prices. Thus far, The Buckle has been successful passing these costs to its customers, but considering the pressures facing the US consumer, there may be a time where this becomes more challenging. That said, The Buckle's target audience is more resilient (or more oblivious, perhaps) to price inflation than "head-of-household" consumers; given the high demand for its fashion brands (especially the denim segment, which represents just over 40% of sales), we believe the company has additional room to increase pricing, if necessary.
  
• Valuation. Like some of the other names on our Top Ideas List, valuation is a bit of a concern because the stock has rallied quite nicely since January lows around $31. However, for a high-growth, well-managed company and an under the radar stock, we believe a modest premium is warranted. The stock currently trades at just under 16x the consensus fiscal 2009 estimate of $3.07, roughly in-line with the peer group. With continued earnings outperformance, a somewhat resilient customer base, and increasing investor awareness, we could envision this stock in the mid-to-high $50 range, barring any additional "shock" type events in the economy.
  

For our mock portfolio purposes, we will assume our entry price on The Buckle was $48.51 (the price at the time of this post).

Previously on The Best Ideas List:
GameStop (NYSE: GME)
Gymboree (NASDAQ: GYMB)

Disclosures
Analyst Ownership? No
Analyst's Family Ownership? No
Analyst's Firm Ownership? No
Investment Banking Conflict? No
Other Conflicts? No

This week, we continue with our list of favorite consumer stocks. Given the significant number of headwinds facing consumers (such as record-high gas prices, declining home values and the corresponding "wealth effect," and lingering credit concerns), we concede that this space may not be appropriate for all investor classes in at the present time. That being said, we still believe there are a number of compelling investment ideas to be found in this sector.

Instead of a long-winded recap of the names, we've decided to release the names one-by-one and provide a brief summary. After we finish revealing our favorite stocks, we will pull together the list into an equal-weighted portfolio and compare our performance to a number of benchmarks over the next year. We may also adjust the list periodically, as there may be better investment opportunities that arise in the coming months.

Today, we add children's apparel retailer Gymboree (NASDAQ: GYMB) to the list.


Investment Highlights

• Children's apparel has an inherent replacement cycle. By nature, children's apparel needs to be replenished several times a year, usually by a mature female demographic with a propensity to spend on their children. Yes, the Gymboree brand carries higher price points than its publicly-traded specialty competition - Carter's (NYSE: CRI) and Children's Place (NASDAQ: PLCE) - and the mass channel private labels. However, the average Gymboree customer represents a high-end audience with limited exposure to rising gas prices and other negative macroeconomic factors. We also expect a modest sales boost in coming years from baby boomer retirees who will likely have more time and resources to devote on their grandchildren. With the combination of established brands that resonate with mothers everywhere (Gymboree and Janie and Jack) and still-emerging brands (Crazy 8) , we anticipate robust sales growth (at least mid-teens) through the balance of the decade and likely beyond.
• Strong financial footing. When evaluating a consumer stock investment, the most important factors to evaluate are (1) top-line growth (including mature and new store growth), (2) the likelihood of sustained profitability and return on invested capital, (3) cash generation and flexibility, (4) debt requirements, and (5) inventory turnover. Gymboree generally passes the test on each of these considerations, with solid top-line growth, sector-leading operating margins and returns on invested capital (nearing 20%), ample cash on hand, a debt-free balance sheet, and inventory turnover over 4.0x (excellent for a mall-based apparel retailer).

Investment Risks

• Valuation. Admittedly, we are a bit concerned about Gymboree's valuation, given the stock's impressive run this year (the stock has climbed back from a low of $27 in January to a recent close of just under $44). However, at about 14x forward earnings (the consensus fiscal 2009 estimate is $3.16, according to Yahoo Finance), we still find this stock relatively cheap to its peer group (about 15x, aided by Children's Place inflated valuation) and anticipated earnings growth (mid-to-high teens). As such, we would comfortable with owning Gymboree's stock into the high-$50 range.
  

For our mock portfolio purposes, we will assume our entry price on Gymboree was $43.76 (the price at the time of this post).

Previously on The Best Ideas List:
GameStop (NYSE: GME)

Disclosures
Analyst Ownership? No
Analyst's Family Ownership? No
Analyst's Firm Ownership? No
Investment Banking Conflict? No
Other Conflicts? No

Since it is a relatively slow retail news week, we thought it might be worthwhile to publish a list of our favorite consumer stocks. Given the significant number of headwinds facing consumers (such as record high gas prices, declining home values and the corresponding "wealth effect," and lingering credit concerns), we concede that this space may not be appropriate for all investor classes in at the present time. That being said, we still believe there are a number of compelling investment ideas to be found in this sector.

Instead of a long-winded recap of the names, we've decided to release the names one-by-one and provide a brief summary. After we finish revealing our favorite stocks, we will pull together the list into an equal-weighted portfolio and compare our performance to a number of benchmarks over the next year. We may also adjust the list periodically, as there may be better investment opportunities that arise in the coming months.

We'll begin today with video game retailer GameStop (NYSE: GME).


Investment Highlights

• Opportune hardware/software cycle timing. Historically speaking, video game retailers are the most profitable during the second and third years following a major hardware platform release. Software presents much higher margin opportunities than the consoles they are played on because they are easier to mass produce and require fewer input costs. The latest round of consoles were released in late 2005 or early 2006, meaning that we are currently in this "software sweet spot". Coupled with an impressive line-up of already released and upcoming titles, we expect video game retailers to continue to post excellent profitability over the next 12 months.
• Economic stimulus check benefit. In our opinion, the Street is overlooking a key consideration of the economic stimulus payments - the age of potential recipients. Individual taxpayers with an adjusted gross income of less than $75,000 will receive the full $600 rebate (joint taxpayers with less than $150,000 will receive $1,200). Yes, The majority of economic stimulus checks will be sent to lower- and middle-income families who will likely spend excess funds on basic necessities or service personal debt requirements. However, there is also large number of stimulus check recipients between the key video-game playing ages of 18-35 that don't necessarily have to worry about housing payments or gas price inflation. Coupled with the recent and upcoming release of highly-sought titles, strong sales should persist for several quarters to come.
  
• Leisure activity substitute. Given the recent attention on soaring gas prices, we also expect discretionary spending on travel and other leisure activities to be down substantially this summer (and likely into the back half of the year). As a result, consumers will likely substitute lower-priced leisure activities and we believe video game retailers (especially those with family-friendly titles) could be a key beneficiary.
  

Investment Risks

• Valuation. Unlike most retailers and other consumer-related stocks, GameStop's stock has held up reasonably well over the past year. At 19x the consensus fiscal 2009 estimate of $2.38, the stock may be too expensive for some investors, even those willing to give the stock a premium valuation. However, the recent pull-back presents an opportune entry point and we believe there could be some upside to the full-year numbers due to the reasons we outlined above, meaning the stock would be more attractive using forward multiples.
  
• Longer-term competitive threats. A few years from now, we are concerned that, like movies and television shows, video game purchases and rentals will be a largely online experience. However, the average consumer does not have the in-home bandwidth or storage capabilities to download large video game files at this time, and we believe GameStop has at least a few years of protection before facing a serious online competition. That being said, we welcome increasing efforts by GameStop to expand its online game sales operations.
  

For our mock portfolio purposes, we will assume our entry price on GameStop was $44.63 (the closing price as of June 10th).

Disclosures
Employee of The Consumer Stock Network, LLC is a member of the Board of Directors or an advisor or officer of the Subject Company. No
Analyst or household of analyst is a member on Board of Directors or serves as an officer, director or advisory board member of the Subject Company. No
Analyst or household of analyst owns shares in Subject Company. Yes, we hold a small long position in GameStop
Analyst or household of analyst owns options warrants, or futures in Subject Company. No

We apologize for a lack of posts over the past week, but we've had our hands full working on a few side consulting projects. Even though it will probably be a slow week for retailer news - outside of new economic data, the most noteworthy event may be the Piper Jaffray Consumer Conference - we'll try to publish a few new posts this week, including a look at the best-positioned stocks for the next six months.