Although north Am-erican consumers are tightening their belts in their efforts to reduce their spending on clothing during the recession, it doesn’t mean all retailers are suffering. While upscale fashion boutiques are feeling the squeeze, retail chains focused on providing value are finding their inventories are turning over as fast as ever.

From an investment perspective, the retail sector has been considered an industry to avoid during the recession, as consumers have shifted away from splurging on discretionary items such as high-end fashion.

“The whole apparel market has not been robust in the short term,” says John Williams, a partner with Toronto-based retail consulting firm J.C. Williams Group Ltd.He adds that it’s been “a tough haul” for high-end fashion stores, as “there is no longer a market thirst for having the latest and greatest items.”

As frugality has become “the new cool” among consumers, the retailers that make ongoing promotions a regular part of their business are the ones that will do well, Williams says: “In the short term, the recession is changing some people’s purchasing habits, and there is a sensitivity to price value that’s very strong.”

If there is one company that is in that sweet spot, it is Framingham, Mass.-based TJX Cos. Inc. The firm owns and operates retail chains such as T.J. Maxx and Marshalls in the U.S. and Winners in Canada. These retail chains are known for selling brand name apparel and merchandise at 20%-60% off the regular price. As such, TJX has watched its sales continue into 2009 at a stable level.

“The fourth quarter wasn’t great for TJX, but it did very well compared with everyone else [in its peer group],” says Howard Tubin, an analyst in New York with RBC Capital Markets Corp., citing Savannah, Ga.-based Citi Trends Inc. as a firm whose sales have been hard-hit.

TJX generated US$4.4 billion in sales for the three months ended May 2, compared with US$4.3 billion for the same period ended April 26, 2008. TJX’s net income also moved upward, to US$209.2 million from US$193.8 million.

“What TJX is finding is that the availability of products has become outrageously good,” Tubin says. “[This allows] its businesses to hold up in good times and bad times.”

Since the recession began and full-price retailers started scaling back on merchandise orders, TJX has found a lot of manufacturers in Asia have been trying to sell excess merchandise resulting from cancelled orders. TJX offers a solution for them, says Tubin, because it buys the dumped orders at dirt-cheap prices.

TJX’s stock may appear overvalued, though, as it rose to US$35.61 on July 20 from its 52-week daily closing low of $18.42 on Nov. 19, 2008. But Tubin says it’s the company’s price/earnings ratio that you really have to look at; TJX trades at a P/E multiple of 16.8, whereas key competitor Citi Trends trades at a P/E ratio of 19.7. “Relative to its peer group,” he says, “TJX is modestly discounted.”

Another undervalued star among clothing retailers is Mon-treal-based Reitmans (Canada) Ltd., which owns retail chains such as Reitmans, Smart Set, RW & Co., Thyme Maternity, Cassis, Penningtons and Addition Elle. The company keeps its low-priced, updated fashion basics in its Reitmans stores, while it places higher-end merchandise in stores such as RW & Co. and Cassis.

With loads of cash sitting on Reitmans’ balance sheet and barely any debt on its books, the firm’s strongest advantage is its purchase methodology, says Neil Lindsell, an analyst with Montreal-based investment bank Versant Partners Inc.: “Because of the significant amount of cash it has, it can pick up merchandise at low rates in Asia, when no one else wants it.”

In addition, no matter what cycle the economy is in, women will always continue to shop at Reitmans because of its prices, Lindsell says: “There’s not too many places where you can find jeans for $25. For women, it’s an affordable indulgence … [and] when you get into a depression scenario, such as the great recession we have been going through, I think women, specifically, go out and buy a new outfit to make themselves feel better.”

As a result of these factors, Reitmans’ gross revenue rose to $231.7 million for the three months ended May 2 from $228.3 million for the three months ended May 3, 2008. However, an ugly combination of too many discounts (meant to drive traffic to stores) and rising inventory costs slashed Reitmans’ profit margins; as a result, net income dropped to $7.8 million from $18.4 million.

@page_break@As the company buys its inventory with U.S. dollars, it got much more expensive for Reitmans to purchase goods in mid-2008, when the Canadian dollar fell in tandem with the price of oil, says Lindsell. However, he’s confident the loonie will soon swing in the opposite direction and improve Reitmans’ margins: “Even if we don’t see a pickup in consumer spending, now that we have seen C$ come off its lows, there should be an improvement to the bottom line.”

Lindsell suggests that now is the time to buy Reitmans stock. Priced at $12.50 on July 20, it was up from its 52-week daily closing low of $7.75 on Feb. 24. “Once we see a pickup in consumer spending, we expect a target price of $14.25,” he says. Lindsell also expects a target P/E multiple of 13, up from the 11.8 it’s at now.

“But returns are better than that when you consider there’s also a dividend yield,” he adds, noting that each stock pays out an annual dividend of 72¢ a share.

Finally, New York-based Aéro-postale Inc. — a retailer focused on providing young adults with cheap chic — is a value clothing chain to look out for, Tubin says: “It has a combination that works well in this current environment. What it offers is not fashion-forward; it’s updated fashion at a great, low price. You can walk into the store and see something at 50% at any given time.”

Aéropostale’s increasing sales show its strategy is working. The company generated US$408 million in revenue for the three months ended May 2, compared with US$336.3 million in the same period ended May 3, 2008. Its net income also rose, to US$31.7 million from US$17.5 million.

Although its stock price has soared to US$38.22 on July 20 from its 52-week daily closing low of US$13.12 on Nov. 20, 2008, it’s still discounted when compared with its peers, Tubin says. For example, Aéropostale trades at a P/E ratio of 15.5, whereas the average for its peer group — which includes companies such as Pittsburgh-based American Eagle Outfitters Inc. and Philadelphia-based Urban Outfitters Inc. — is closer to 20.

Apart from the value companies such as Aéropostale and Reitmans offer consumers, the future success in turning over their inventories will depend on how well they can sell merchandise through multiple channels, such as the Internet, Williams says: “In analyzing company, I would want to see how effective its cross-channel marketing is. The U.S. stores that have done well in the past two years are the ones that have powerful transactional websites and cross-channel marketing among the store, website and catalogue.”

Although there are concerns that consumers will veer away from value-oriented clothing retailers and go back to their old ways of splurging on the latest fashion once markets turn around, this won’t happen anytime soon, Williams says.

“There are still too many major grey clouds hanging over the North American market, which no one knows when will clear up,” he says, pointing to rising unemployment numbers. “Besides, there’s been no major shift in fashion of any kind that’s compelling people to renew their wardrobe.” IE