3 Retail Stocks to Buy on Bottom-Line Expansion: Lithia Motors Inc (LAD) and More

Dicks Sporting Goods Inc (NYSE:DKS): Dick’s Goods is relatively well-positioned to outperform in 2013, even though the weather will likely not be a friend for the second year in a row. The company’s healthy product trends (absent the weather noise) combined with a number of gross margin drivers could lead to upside to the current consensus estimate of $2.92 in 2013. The system improvements present the most significant opportunity in 2013 and 2014, as the company focuses on regional pricing and better markdown management. In addition, margins should benefit from continued growth in private label, significant price optimization, zone pricing, and regional merchandising opportunities, which should move margins through the 10% range in the near future.

While the stock has moved back up, the stock is still trading below a 17x multiple on FY 14 consensus EPS. The current valuations could point to another 5-10% upside to the stock. However, past the near term, risks include improvements and/or accelerating store growth of direct big box competitors, rising e-commerce penetration in the sporting goods category, including moves from Amazon.com, Inc. (NASDAQ:AMZN), and premium brands focusing more on direct distribution or expanding distribution to other channels. These threats could become material later in 2013.

Foolish Bottom Line

Bottom-line expansion seems to be a common theme in the retailers, which is expected to bring a rally in this industry in 2013.

The article 3 Retail Stocks to Buy on Bottom-Line Expansion originally appeared on Fool.com and is written by Masam Abbas.

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