Top 3 Retails Stocks to Own Now

Tuesday, July 31, 2007
By Faisal Laljee

This post was first published on TheStreet.com

GameStop (GME) – GameStop is the world’s largest video game retailer, operating more than 4,800 stores worldwide. It acquired its largest competitor Electronic Boutique back in 2005 and since then has had virtually no competition in the space. The reason companies like Best Buy (BBY), Wal-Mart (WMT) and Target (TGT) have not been able to compete with GameStop is because the specialty video game retailer has in-house expertise in video gaming, along with a large variety of games. It is a one-stop shop for consoles, accessories, magazines, posters and games. But most importantly, GameStop sells used video games, which has huge margins, 50% to be exact compares to 20% for new games.

The company operates stores in 16 countries, and plans to open 500 more stores just this year with 200 being overseas. Although US is its biggest market, GameStop has 500 stores in Europe with plans to open more.

According to Robert Plaza at Zacks Investment Research, the video gaming industry will have solid growth for the next three years. In anticipation of this strong growth, the stock is up 100% in the last year and is down just under 10% from its recent high. With games like Call of Duty 4, Bioshock, GTA 4, Virtua Fighter 5 and Halo 2 due for release later this year, and with the opening of additional retail outlets, GME is a good stock to own.

Under Armour (UA) – Under Armour is a sports apparel manufacturer that just reported stellar second quarter earnings. Revenues were up almost 51%, while net income grew 135%.

The company increased their operating margins on top of their already best-in-class margins, and reduced general and administrative expenses. What is even more exciting is future growth in international markets. Indeed, UA has very little market share in Europe, which bodes well for future earnings.

Finally, the stock has a short interest of 37%, which means that the stock will catch a wave of short sellers today. Catch it and ride it for some time to come.

Crocs (CROX) – Crocs makes comfortable but ugly footwear that has taken America by storm. The company distributes its products through approximately 7,400 store locations in the U.S. Last week’s earnings beat all expectations with net income up 205% and revenues for the quarter up 162%. More importantly, revenues in Europe were up 920% and the company plans to target South America next with its recent factory opening in Brazil.

A couple of weeks ago, Crocs announced plans to expand into the apparel business and has diversified its footwear portfolio through acquisitions. The stock is up 300% in the last year, but even then, it trades at just around 20 times earnings. Following the report last week, Wedbush Morgan increased their price target on the stock to $71, but I believe that it is a conservative price target. In fact, I would not be surprised to see CROX hit $100 before year-end, especially considering it has a 30% short interest.

–Faisal Laljee
Full Disclosure: I own CROX and UA but my positions can change anytime without notice.

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