Fashion retailer Charlotte Russe is looking as solid as ever -- and it's on sale. By Bob Frick, Senior Editor July 8, 2008 When the price of oil goes up, retail stocks go down. "It's just a mechanical phenomenon," says Lawrence Creatura, co-manager of the Touchstone Diversified Small Cap Value fund. And it's not an irrational phenomenon. Rising oil prices mean higher gasoline prices, and more-expensive gas pinches consumer spending, which has already been weakened by the decline in housing prices.The upshot of all this for a bargain hunter like Creatura is a surfeit of investment opportunities as shares of many solid growth companies fall into his value universe. "It's a playground these days," he says. Consider women's clothier Charlotte Russe Holding (symbol CHIC). In January of 2007, the stock fetched $33. As recently as June 2007, it traded at $29. But then, as the economy began to falter, the shares embarked on a steep downward slope. They bottomed at about $12 last November before steadying. The stock closed at $17.22 on July 8, giving it a market value of about $359 million. Charlotte Russe operates about 450 stores in malls around the country, catering to young women in their teens and twenties. In every year since the company went public, in 1999, at some point the stock has traded for at least 24 times trailing earnings. But this may be the year in which the streak ends. The stock now sells for less than 12 times the past year's profits. Advertisement The price-earnings ratio has compressed because profits are under pressure. That's partly because of rapid expansion and partly because of a slowdown in sales. To move inventory, the San Diego-based company has had to mark down prices to engage in promotions. As Creatura notes, inventory in the clothing industry is like inventory in the fish industry -- "if you don't sell it, you smell it." Analysts on average see Charlotte Russe earning $1.39 per share in the fiscal year that ends next September (down from $1.43 in the previous year) and $1.67 in the September 2009 fiscal year. But Creatura argues that the company is so strong that the P/E-and, hence, the share price, will inevitably expand. For starters, Charlotte Russe possesses a solid balance sheet. At the end of its second fiscal-year quarter (which ended March 29), the company held $125 million in cash, or $5 per share, and had no debt to speak of. Flush with all that cash, Charlotte Russe spent $73 million the following quarter to buy back 16% of its shares. Creatura adds that Charlotte Russe is has some immunity from the retail flu. True, the stores sell fashion merchandise, but the stuff is cheap compared with what's sold at other chic outlets geared toward teenagers (if you've ever spent $30 on a T-shirt for your daughter at Abercrombie & Fitch, you know what he means). While people may postpone spending on big-ticket items, such as cars and washing machines, when economic times are tough, they may shift their dollars to "smaller-ticket expenditures," Creatura says. Moreover, he notes that Charlotte Russe refreshes its merchandise several times a week -- even daily at some of its high-traffic stores -- creating an "entertainment component" for the shopping experience. When will the stock turn around? Creatura says his crystal ball is murky in the short term. "But I can look at attributes of the business and see that it's healthy and growing," he says. "This will be a great stock."