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Stage Stores Inc.: A Strong Buy

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A combination of solid year-to-date return of 70.4%, stellar second-quarter fiscal 2012 performance, rising estimates and strong comparable-store sales number for the month of September facilitated Stage Stores Inc. to attain a Zacks #1 Rank (Strong Buy) status on October 23, 2012.

The Rank Drivers

Stage Stores’ comparable-store sales for September rose 11.1%, following an increase of 6.5% in August, buoyed by merchandising initiatives and marketing strategies undertaken. Furthermore, this department and off-price store retailer appears to have enough potential to attain new highs based on an upbeat outlook for fiscal 2012 following strong second quarter results.

Stage Stores posted second-quarter fiscal 2012 earnings of 37 cents per share on August 16, beating the Zacks Consensus Estimate of 34 cents by 8.8% and year-ago earnings of 29 cents by 27.6%. The upside came on the back of higher comparable-store sales and improved merchandise margins. This is the second consecutive quarter that the company has outperformed the Zacks Consensus Estimates.

Net sales of $381.6 million comfortably surpassed the Zacks Consensus Estimate of $370 million, and grew 8.2% year-over-year driven by comparable-store sales increase of 5.4%. Gross profit grew 10.9% to $115.2 million, whereas gross margin expanded 80 basis points to 30.2% on the back of robust full-price sales and reduced markdowns.

Buoyed by strong first half performance, Stage Stores raised its outlook for fiscal 2012. Management now envisions comparable-store sales growth between 2.5% and 3.5%, and projects earnings in the band of $1.15 to $1.25 per share. Earlier, the company had forecasted comparable-store sales increase of 0.8% to 2.4% and earnings between $1.08 and $1.20 per share.

Stage Stores now expects fiscal 2012 sales in the range of $1,605 million to $1,620 million. Previously, it had predicted sales between $1,592 million and $1,615 million.

Uphill Earnings Estimates

The Zacks Consensus Estimate for fiscal 2012 rose 4.9% to $1.28 per share over the last 30 days, implying year-over-year growth of 38.9%. The current estimate lies ahead of the company’s guidance range. For fiscal 2013, the Zacks Consensus Estimate is $1.45 per share, increasing 5.8% over the same time frame, and marking a year-over-year growth of 13.7%.

A Look at Valuation

Stage Stores currently trades at a forward P/E of 18.67x, indicating a premium of 6.7% to the peer group average of 17.49x. Again, its price-to-book ratio of 1.72 reflects a substantial discount of 43.2% to the peer group average of 3.03. Similarly, the price-to-sales ratio reflects a discount of 37.7% to the peer group, with shares trading at a multiple of 0.48. The company’s compelling fundamentals are well supported by its long-term estimated EPS growth rate of 15.1%.

Company Overview

Headquartered in Houston, Texas, Stage Stores operates department stores and off-price stores in the small and mid-sized markets of the United States. The company’s department stores operate under the names such as Bealls, Goody’s, Palais Royal, Peebles and Stage, while its off-price chain carries the Steeles name.

These stores offer moderately priced, nationally recognized brand name apparel, accessories, cosmetics and footwear. As of October 1, 2012, the company operated in 40 states through 842 stores. Stage Stores primarily competes with Ross Stores Inc. (ROST - Free Report) .

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