The retail industry is comprised of companies that sell products and services industry. That said, there’s a wide array of retail stocks out there, and these include discount stores and department stores, just to name a few. Additionally, the retail industry includes online merchants, and it stretches across various subindustries. The retail industry is cyclical in nature, and tends to do well during the holiday season, due to consumers purchasing more products and services as gifts. Now, there are a lot of retail stocks out there, and we’ve narrowed down some small-cap retail stocks that have attractive price-to-earnings ratios, and could potentially be undervalued in relation to some of their peers.
Price-to-Earnings Ratio Defined
The price-to-earnings ratio (P/E) is one of the most commonly used ratios used to value a company, in relation to its industry or peers. The P/E compares a stock’s current share price in relation to its earnings per share (EPS). Now, if a company is operating at a loss, or has an earnings loss over the past trailing 12 month period, then the stock’s P/E ratio would be immeasurable.
For example, if you look at Finviz, you’ll notice that Abercrombie & Fitch Co. (NYSE: ANF) has an immeasurable P/E ratio, and you’ll notice a dash next to the P/E ratio on most websites that provide financial data.
Genesco Inc. (NYSE: GCO) is a specialty retailer and sells footwear, sports apparel, headwear and accessories in over 2,800 retail stores, as well as leased departments, in Canada, the U.S., the U.K., Germany and the Republic of Ireland. The retail stores and leased departments fall under the names Journeys, Journeys Kidz, Shi by Journeys, Schuh, Schuh Kids, Little Burgundy, Lids, Locker Room by Lids, Lids Clubhouse and Johnston & Murphy. Additionally, the company offers online websites for shoppers.
Take a look at some of the valuation ratios for Genesco Inc, as of June 2017.
If you notice the table above, Genesco had a trailing 12-month price-to-earnings ratio of 7.9, while the apparel stores industry had an average trailing 12-month P/E of 21.5. That said, the stock was only trading 7.9 times its earnings per share, while the average company in the industry was trading over 20 times the average EPS. In other words, Genesco would be considered undervalued in this aspect.
Check out GCO on the daily chart below.
Now, the primary reason for the stock’s low P/E ratio was due to the stock’s sell off, which may have caused the stock to be undervalued.
The Buckle Inc
The Buckle Inc (NYSE: BKE) is a small-cap leading retailer of medium- to better-priced footwear, accessories and casual apparel for fashion-conscious young men and women, according to the company. Buckle currently operates, under the names The Buckle and Buckle, in over 400 stores, in 44 states. The company markets an array of brand names, as well as private label casual apparel, which includes tops, sportswear, outerwear, footwear, denims, other casual bottoms and accessories.
Take a look at some valuation ratios for The Buckle, provided by Morningstar.
Again, notice the table above, and these are indications that BKE may be undervalued. The stock currently has a trailing 12-month P/E of 9.2, while the industry average was 21.5. That in mind, The Buckle had a more attractive P/E ratio since investors would be paying only 9.2 times its EPS, while investors of an average company in the apparel stores industry would be paying 21.5 times its EPS. In other words, if BKE had an annual EPS of $1, investors would be paying $9.20 per share, at this point in time.
Francesca’s Holding Corp
Francesca’s Holding Corp (NASDAQ: FRAN) is another small-cap retail stock that has an attractive P/E ratio. Francesca’s tailors its items in order to appeal to its target market, which is the 18 to 35 year old, fashion conscious female market. However, the company finds that women of all ages purchase its high-quality, trend-right apparel, jewelry, gifts and accessories at prices that are attractive to many consumers. Now, Francesca’s offers a wide selection, but limited quantities, of individual styles and it introduces new merchandise to its boutiques five days to increase brand loyalty. The company believes it has an opportunity to continue growing its upscale boutique base to around 900 boutiques in the U.S. Moreover, with many consumers shopping online, Francesca’s also offers its merchandise online.
Examine some of the valuation ratios for Francesca’s Holding Corp below.
FRAN currently has a trailing 12-month P/E ratio of 10.9, and when compared to the apparel stores industry average, the stock would be considered undervalued by some investors and trades. Additionally, Francesca’s had a price-to-book ratio of 3.7, while the industry average is 5.2. Moreover, it had a trailing 12-month price-to-sales ratio of 0.9. That said, investors would be paying less per $1 of EPS, book value and sales, relative to the apparel stores industry.
DSW Inc. (NYSE: DSW) is a leading footwear and accessories retailer operating a portfolio of multiple off-price retail concepts, one of which is Designer Shoe Warehouse, the company’s primary concept. Designer Shoe Warehouse offers consumer with a plethora of brand name and designer casual, dress and athletic footwear and accessories. The company currently has 500 stores in 43 states, and its affiliated business group operates nearly 400 leased departments for other retailers in the U.S. Additionally, DSW offers an e-commerce site to provide consumers with an efficient and convenient way to purchase footwear.
Let’s take a look at DSW’s valuation ratios.
DSW’s trailing 12-month price-to-earnings ratio indicates that it’s currently trading just 12.1 times its EPS, while the industry is trading at 21.5 times earnings, on average. Consequently, the stock may be considered undervalued and an attractive investment by value investors.
The price-to-earnings ratio could provide investors and traders with clues whether a stock is undervalued. Now, keep in mind that the P/E ratio is only one dimension of value investing, and if you’re looking to trade or invest in small-cap retail stocks, you should consider other factors, such as earnings and revenue growth, same-store sales and macroeconomic conditions.