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Time Is Right for Retail Stocks

Now is the time for investors to dabble in retail, according to analysts and industry consultants who say current stock valuations are attractive.

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Now is the time for investors to dabble in retail, according to analysts and industry consultants who say current stock valuations are attractive.

Shares of many apparel retailers have taken a beating over the past two months, trading at 52-week lows. And coming off weak January same-store sales means investors might be able to pick up "solid companies" at bargain-bin prices.

"We believe investors should start looking at the retail sector as a value play and hence should start accumulating shares in well-managed companies with growth opportunities in terms of store growth and operating margin expansion," said Liz Pierce, retail analyst at Roth Capital Partners.

The key to hand-picking value stocks is to look for companies that have a historically low price-to-earnings ratio, or P/E, which is the current stock price divided by trailing annual earnings. And a prospective earnings growth, or PEG, ratio below 1 is also a key metric.

Out of 33 specialty retailers tracked by WWD, 17 have P/E ratios below the industry standard of 17.2, while 12 have a higher ratio. Four of the companies posted losses so have no P/E data.

"There are hordes of stocks currently at historic lows in P/E and PEG ratios. The trick to investing is buying a good company that's a bad stock. Currently there are whole sectors, not just a few companies, out of favor," said Craig Johnson, president at Consumer Growth Partners, a consulting firm.

Teen retailers in particular could be attractive to long-term investors.

Aéropostale Inc., which has a P/E of 17.1, PEG ratio of 0.98 and a 13.1 percent operating profit margin, has spent the past year reshaping its merchandise and brand image. With the appointment of Mindy Meads as chief merchandising officer in May, the company has moved away from just basics, adding some fashion-forward and veneer items to its mix. For the spring it will incorporate dresses and swimwear to its assortment.

The company was also one of the only apparel retailers that delivered double-digit comp growth during the holiday season and it was the only teen retailer with positive January results.

"We believe Aéropostale remains ideally positioned to capture more 'trade down' from its competitors in 2008 and achieve further top- and bottom-line upside, despite the weary economy," said Eric Beder, retail analyst at Brean Murray, Carret & Co. "With management's focus on further improving inventory turns and driving fashion newness, we believe 2008 will be another year of demonstrating the strength of the company's business model."
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