Retail StocksYou are asking for trouble if you think retail stocks are for the long-term.

The only thing that is worse than watching internet stocks bubble up and then crash is the perpetual cycle of hot clothing retailers going boom and then bust.  It is rare for any clothing company to get hot, stay hot, and remain hot.  There are very few exceptions and I’ll show you how to pick out the survivors from the undead.

Much of the danger in retail lies in the fickleness of consumers. When sales of a given company’s products roar off the launch pad, it can be difficult to determine exactly why the rocket streams skyward. Is it the product’s high quality? The right price point? The marketing campaign? Or is it because it happens to dovetail with the zeitgeist in such a perfect way as to become trendy? Or is it some, or all, of the above?

There are ways of doing retail right, however. Here are two examples of crash-and-burn retail and one example of steady retail.

Christopher & Banks (NYSE:CBK) is an interesting story because the women’s clothier was founded in 1956 under the Braun’s name. It went public in 1992 and returned 350% to shareholders through 2000, when it rebranded as Christopher & Banks. The stock took off over the next two years, as the rebranding campaign obviously worked. The stock was a 9-bagger over that period.

Since then, the stock chart has looked like an extreme roller-coaster ride. It last hit $30 in 2006 and now trades at $9.59, and eliminated its dividend a few years ago. The other problem with retail is that a bad economy can hammer a company. After a solid 2007, Christopher & Banks’s net income gradually eroded. It’s had losses from 2008 to 2012, but finally turned the corner and posted an $8.6 million profit in FY13.

Chico’s FAS (NYSE:CHS) fared even better. From 2000 to 2006, the stock was a 36-bagger. Although it serves a different market, the economy had been equally harsh on Chico’s.  However, Chico’s somehow managed to turn the corner faster and rejigger its image and its offerings.  In FY11, the company had a $141 million profit, following by $180 million in FY12.  Then, back to the old ways – profit soured to $65 million in FY13 as sales flattened out.  See?  Fickle customers will kill you.

The good news is Chico’s can still turn things around again, as it has $171 million in cash, no debt, and is managing about $100 million in FCF each year.  At $15.40, it is still 65% off its all-time high and have been flat for some time.

Jos A. Bank Clothiers (NASDAQ:JOSB), which is now owned by Men’s Wearhouse (NYSE:MW) is the kind of retailer you want to look for.  I first noticed one near Grand Central Station in NYC in 2000.  Sure enough, the company was public, growing modestly and deploying its cash carefully.  The growth strategy was never explosive.  They took their time, built out their brand, advertised in very targeted markets, and grew earnings and cash flow.

And there’s one other thing: they only sold men’s clothing, mostly formal wear.  That’s a consistent product.  There’s consistent demand.  Trends and styles change, but not outrageously.  Jos. A Bank was likely to have something for every taste and style.  So the stock became a 50-bagger for those who purchased it early on.

So, before leaping into a retail stock, take a good long look at the market it serves and what products it sells. You don’t want to go with the trend, because you may find yourself on the downhill part of that roller-coaster ride.

Instead, think about trading clothing stocks.  When a new one hits the street and has a hot quarter, you can jump in.  But be ready to sell at a moment’s notice when that first disappointing quarter hits, because it will.

Lawrence Meyers does not own shares of any company mentioned.

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