Zacks Investment Ideas feature highlights: Lululemon, Dick's Sporting Goods, Gap and Vera Bradley

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Dec 30, 2011, 09:30 ET

CHICAGO, Dec. 30, 2011 /PRNewswire/ -- Today, Zacks Investment Ideas feature highlights Features: Lululemon (Nasdaq: LULU), Dick's Sporting Goods, Inc (NYSE: DKS), Gap, Inc (NYSE: GPS) and Vera Bradley (Nasdaq: VRA).

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Hot Holiday Retailers

All of the gift-giving holiday's are have come and gone. In the wake? A lot of people asking about retail stocks.

At least half a dozen people have been me asking about one retailer or another. Mainly it has been stemming from anecdotal experience. "I was at XYZ shopping before Christmas and the line was round the block! Should I buy the stock?" or "Every person in my family received or gave a gift from ABC, does that mean they will have a great quarter?"

While those are great signs for certain retailers, not all merchants are created equal. But it did get me thinking about which stores were most likely to beat expectations thanks to a successful holiday season.

But, we can't just jump in based on one piece of info. So what should we look for before buying a retail stock?

Good Signs

First of all, optimistic earnings heading into the season are a great sign of a healthy stock in general. So, a Zacks #1 Rank (Strong Buy) or Zacks #2 Rank (Buy) is a great place to start. That means the combination of estimate revisions and surprises have them poised to outperform, even before we see updates on holiday spending.

Secondly, and this will vary from person to person, I'll give some weight to the gifts and lines that I saw. Or those companies that people were specifically asking about.

Finally, the discount trends. You may have been bombarded with discounts from some stores of 40%, 50%, or even more in the past month. While that can help the lines in the store, it can be a red flag that corporate was worried and needed to fight for market share. We also saw this just ahead of Thanksgiving when retailers were opening earlier and earlier.

A Few Examples

Lululemon (Nasdaq: LULU) is the stock that has been thrown around the most. While it started out as premium yoga gear company, the brand has expanded leaps and bounds. Women, and now men, are wearing their clothes. And workout gear is not just for the gym anymore, its being worn in almost any casual setting.

As far as earnings go, shares have a Zacks #2 Rank (Buy) thanks to a rush of upward estimates revisions in the past month. The latest uptick in estimates pushed growth rates to just over 50% for this year and another 26% for fiscal 2013.

One caveat with LULU is that, like their merchandise, you would be paying a premium. Of course you can always argue that it's worth the price. Shares are trading at 32 times next year's forecast, which gives it a PEG of 1.4. Not outlandish, but not a bargain.

Dick's Sporting Goods, Inc (NYSE: DKS) is a full-line sporting goods retailing offering just about everything from running shoes and shorts to crossbows and hunting gear. There are over 500 locations in the U.S., including 81 Golf Galaxy stores.

Go to their site. The only mention of discounts is on their clearance rack and free shipping on orders over a certain amount. That's pretty standard. Now go to Gap, Inc's (NYSE: GPS) site. Right on the homepage there are sales of 30-60% off regularly priced clothes. That doesn't mean GPS are bad, but I like that DKS is sticking to full prices.

DKS is currently a Zacks #2 Rank (Buy) that I took a look at because I overheard several different coworkers talking about how much they love the place. But the earnings look good too. After the last round of upward revisions, the analysts are expecting earnings to be up 25% for the current year and another 17% next year.

Shares of DKS are a decent value too. The stock is going for about 15 times estimates and with a PEG near 1.1.

Vera Bradley (Nasdaq: VRA) makes quilted handbags and other accessories. With family coming into town, it seemed that 90% of the women had at least one item from Vera Bradley. When I mentioned it at work, one of our other strategists mentioned that her niece said it was the new "in" thing at her school. They could report some pretty robust holiday sales.

But, with a Zacks #2 Rank (Buy) the earnings are already looking good. EPS is expected to rise 5% this year and another 19% next year. Shares are going for 19 times estimates, which puts the PEG ratio near 1.0. So the long-term growth rate is coming at a decent value.

Don't Stop There

Take a look at what you bought or received. Listen to what stores your friends and families are talking about. Sometimes great investments are right in front of us.

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