Best Investing Ideas in Retail

By Demitrios Kalogeropoulos, Anders Bylund, and Steve Symington Markets Fool.com

Retailing stocks as a group are sitting out the recent market rally. The industry is struggling with falling customer traffic as shoppers rapidly shift their buying behavior.

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But the pessimism could spell opportunity for investors hunting for deals. Below, Motley Fool contributors offer up PCM(NASDAQ: PCMI), GameStop (NYSE: GME), and Carter's (NYSE: CRI) as a few of the most attractive bets in a segment that's seen more than its fair share of bearish selling.

Image source: Getty Images.

Turnarounds do happen

Anders Bylund (PCM): Here's something you don't see every day -- a bona fide turnaround story in progress!

PCM is the company formerly known as PCMall. It sells technology products through retail-chain subsidiaries such as TigerDirect, PC Mall, EggHead, and MacMall. It's been a difficult market in recent years; PCM's sales and cash flows were stagnant between 2010 and 2014, and that's a rather generous description of the company's fortunes.

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All that changed in 2015.

That year, PCM closed a slew of small but strategic acquisitions, building the foundation of a strong and growing e-commerce platform. The $14 million TigerDirect buyout unlocked stellar sales growth, and positioned PCM to sign an all-star cast of major clients. Since then, annual sales have increased by 70% while free cash flows nearly tripled.

The company is increasing its account executive headcount by leaps and bounds, growing its commercial segment by 31% over the last four quarters while the public sector division grew 31% larger.

Share prices have skyrocketed 250% higher over the last year, but a penny-pinching P/E ratio of just 19 times trailing earnings leaves plenty of room for further growth.

Long story short, PCM's management unlocked a real turnaround process and is grabbing that opportunity with both hands. Your fellow investors inMotley Fool CAPSrate this investment at five out of five stars today.

A cheap retailer with a huge dividend

Demitri Kalogeropoulos (GameStop): Investing in GameStop today might sound like about as good an idea as buying Blockbuster some time before its 2010 bankruptcy filing. After all, the video game retailer is seeing its dominant position in physical disc entertainment evaporate thanks to surging growth in the digital sales channel.

Yet this business isn't near the death spiral that's reflected in its depressed valuation of just six times trailing earnings. Yes, sales fell by double digits last year as the physical gaming business shrank dramatically. But GameStop also logged its third straight year of profitabilitygains thanks to healthy growth in new business lines including consumer tech, cellular phone service, and collectibles.

CEO Paul Raines and his executive team were surprised by the severity of the pullback from gamers last year, but their plan to transform into a more diversified and profitable enterprise is working. Non-physical gaming revenue accounted for almost 40% of earnings last year, up from 25% in 2015, and gross profit margin jumped 4 percentage points to 35% of sales.

Buying GameStop today involves signing on to a business that's likely to see declining profits for at least a third straight year. And though the sales trend should improve, it will probably remain negative in 2017. However, the stock sell-off seems overdone given the current valuation of about five times the $340 million that GameStop is expected to earn this year. And while they wait for a potential rebound, investors can collect a whopping 7% dividend yield that's well covered by the retailer's earnings.

A stock even your kids can love

Steve Symington(Carter's): Carter's has rebounded nicely from the 52-week low reached in early February, helped by optimism following the company's strong fourth-quarter 2016 results. Sales last quarter climbed 7.8% year over year, to $934.2 million, thanks primarily to strength in both its Carter's and OshKosh retail segments. On the bottom line, that translated to 21.2% growth in adjusted net income, to $88.7 million, while adjusted earnings per share climbed 27.9%, to $1.79, helped by Carter's ambitious share repurchase program.

Growth isn't quite as rosy in the near term, however. Carter's expects revenue in the current quarter to fall in the low-single-digit percent range from the same year-ago period, as expected declines in its domestic wholesale and international businesses will more than offset continued domestic retail growth. But investors need to keep in mind the first quarter is also Carter's smallest in terms of revenue, as well as the fact some sales are being pushed into the second quarter due to the Easter holiday arriving in April this year. What's more, Carter's earnings will be lower this quarter (in the range of $0.80 to $0.85 per share), partly as the company plows resources into sustaining its longer-term growth, with initiatives including the creation of a more seamless experience between its online and physical store footprints, and productivity programs to improve labor management, assortment planning, and pricing strategies.

Carter's also isn't afraid to carefully pursue acquisitive growth; last quarter, the company paid $140 million to acquire Skip Hop, a global lifestyle brand aimed a families with young children whose products are distributed in over 5,000 retail locations in more than 60 countries.

As such, over the next five years Carter's is targeting a modest 6% annual revenue growth, which would bring annual sales to above $4 billion by 2021 (up from roughly $3.2 billion in 2016). That should result in 10% annual earnings growth over the same period, including contributions from Skip Hop and a steadily decreasing share count thanks to continued stock repurchases. With Carter's shares still down around 11% over the past year and trading at a reasonable 14.6 times this year's expected earnings, I think long-term investors would do well to consider opening or adding to a position.

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Anders Bylund has no position in any stocks mentioned. Demitrios Kalogeropoulos has no position in any stocks mentioned. Steve Symington has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Carter's. The Motley Fool has the following options: short April 2017 $28 puts on GameStop. The Motley Fool has a disclosure policy.