Consumer spending has been improving for at least a year now, but you wouldn’t know that by looking at the stock price charts of the retailers across the United States. This disconnect is somewhat confusing given the holiday shopping season was strong, as was January when shoppers stayed busy grabbing end-of-holiday deals. [See yesterday’s Chart of the Day for more on this…]

The lull in industry share prices has uncovered some compelling opportunities to pick up leading retailers at very reasonable prices. The reasonable valuations are appealing, and from a fundamental standpoint, the wind should be at the back of many retailers as spending trends continue to recover from the economic downturn. The three players below are likely to see easier sailing for the foreseeable future but also possess a number of positive attributes that make them leaders in their respective retailing niches.

1. Bed Bath & Beyond (Nasdaq: BBBY)
The latest recession was both kind and unkind to Bed Bath & Beyond. The downturn dented sales, especially in the category of home goods that homeowners stopped buying to spruce up their homes in the hopes of flipping them quickly. However, it also resulted in the demise of archrival Linens ‘n Things, which was less well-managed and couldn’t handle the dramatic downturn in its business.

Bed Bath & Beyond is seeing a strong upturn in business at its existing stores, with 7% growth in  same-storesales during the latest third quarter. Total sales jumped 11% and are projected to improve more than 10% for the full year. Earnings should reach about $3 a share and cash flow is growing rapidly as well.

The real upside in the stock stems from smaller store concepts, including buybuy BABY and Christmas Tree Shops. Buybuy BABY represents a formidable competitor to Babies “R” Us, which is the only baby superstore currently out there, and Christmas Tree is similar to Bed Bath & Beyond, but more discount-oriented. There are just over 100 stores of both concepts and nearly 1,000 Bed Bath & Beyond locations, which demonstrate the potential of the newer store brands. The stock’s forward price-to-earnings (P/E) ratio is 16 but worth it as long as the newer concepts keep growing rapidly. 

2. Urban Outfitters (Nasdaq: URBN)
I was a skeptic at first, but Urban Outfitters has found a way to keep its edge while expanding out of trendier university towns and into more suburban locations. The success of its Anthropologie stores, which cater to women between ages 30 and 45, deserve much of the credit and now account for more than 40% of sales. The namesake stores have also found a way to stay relevant to a younger crowd by offering an eclectic mix of apparel and apartment furniture.

Urban has managed to keep sales strong through the recent economic downturn. Recent trends remain robust, as sales grew 13% on new store openings and comparable sales growth of 6% at existing stores. I recently highlighted that sales have grown in excess of 20% for a decade now, and management targets this level of sales growth over the long haul.

Urban Outfitters’ stock ran up after the strong recent earnings release but has come back down to earth somewhat and now trades at a forward P/E of just over 20. This may seem high, but it is easily worth it if management delivers on its ambitious growth goals.

3. Macy’s (NYSE: M)
Like Urban, Macy’s shares have come back down a bit after a rally to end the all-important holiday season. Macy’s is a mature concept with about 850 giant department stores across the United States, but the company is seeing a revival in sales. This is due to the improving economy but also a return to its roots in stocking merchandise to appeal to local tastes and customs.

In its most recent quarter, total sales rose 6.6%, while same store sales improved 3.9%. This is all the more impressive as Macy’s doesn’t have a lot of real estate left to expand into. It did open a couple of namesake stores, as well as a Bloomingdale’s discount store, however. The company also saw online sales jump an impressive 24%.

Macy’s trades at a very reasonable 11 times earnings expectations for this year and is projected to post full-year sales growth of 6.5%. The dividend yield is modest at 0.9%, but could be boosted once the company starts generating excess capital from its large store network.
 
Action to Take —> Each of the retailers above is lagging the market so far this year. The S&P 500 is up a few percent, while Bed Bath is down 2%, Urban is down close to 6% and Macy’s is down 12%. As such, each has solid upside potential.

I would characterize Macy’s as the value play, with its low valuation, yet decent growth prospects. Urban should stand out to growth investors given its standout prospects could easily justify its above-average P/E. Bed Bath & Beyond stands somewhere in the middle, with decent growth potential and a pretty reasonable mid-teens P/E. All could be winners in their own right over both the medium-term and the longer haul.