Who will be the next J. Crew?

As news of a buyout propelled JCG shares 16% higher Tuesday, investors were already looking for other potential takeover targets.

By Jim Cramer Nov 24, 2010 9:40AM

jim cramer of thestreet.comWith the J. Crew (JCG) deal opening people's eyes to the fact that Gymboree (GYMB) was not a one-off and that many retailers are selling at ridiculous prices to their long-term growth rates, the frenzy is on to find the next one to go.

 

Staples (SPLS), Urban Outfitters (URBN), Big Lots (BIG), Abercrombie & Fitch (ANF), J.C. Penney (JCP), Radio Shack (RSH), Gap Stores (GPS) and Macy's (M) are all rallying on hopes that they can be next.

 

I love a good sympathy rally, but let's take a look at some of these. Urban Outfitters fits the pattern of J. Crew in that it is undervalued, selling at a multiple that's relatively equal to its growth rate. It has been an aggressive buyer of its own stock, and it has terrific international expansion plans as well as several divisions, including Anthropologie and Free People, besides its flagship, so it's got a lot of opportunities.

 

However, it is a $6 billion company that has a lot of fashion to it, and fashion can be fickle. J. Crew has fashion, too, but it was cheaper and in many ways more consistent. I think Urban could get struck by lightning, but it is a bit of a long shot.

 

Both Macy's and J.C. Penney are classically cheap, and I know that Bill Ackman is agitating for something good to happen at Penney. But Penney isn't necessarily undervalued. Department stores seem almost endangered if they have no momentum, and Penney has none. It isn't as bad as Sears (SHLD), not even close, but I can't imagine this behemoth levered up. Macy's? Been there, done that. Bankruptcy. I think J.C. Penney would also be thinking the same thing, as would the P/E guys.

Radio Shack is always the subject of takeover rumors and then always rejected. It is cheap, and it has a ton of stores, some of which could be trimmed under the umbrella of going private. I can never rule out this 10-times-earnings company that has 8% growth -- but if it hasn't happened already, I am skeptical.

 

Staples is a new rumored name. It's been down in the dumps for a long time and just showed its first sign of life in the last report. I think that it makes sense only if you think that Office Depot (ODP) or Office Max (OMX), the two big competitors, are about to go under. Office Depot is a possibility, while Office Max is doing quite well. I would make a Staples buyout contingent on the shrinking of Office Depot.

 

Abercrombie & Fitch is a company that seems tortured. It is in the hit-or-miss teenage apparel space, and bankers would really have to be confident that the company's line of clothes has reached a level of stability that I think isn't there.

 

Big Lots? Kind of a slop shop. I think it's simply not good enough to risk good capital, given that it doesn't even equal Linens 'n Things, which went bankrupt. I think Big Lots, after that last quarter, is on the decline. I wouldn't touch it. I would sell it.

 

Finally, Gap. Now, here is a cheap one. At its current $12 billion market cap, it would be a huge deal. I know these P/E firms have to spend a lot of money, and that could make it so this is one that could bring about bids. I think of all of the ones above, it is the most likely to happen. That said, it isn't doing well enough to buy on its own, without a private-equity bid, so this one, too, I would take a pass on.

 

Ironically, one that is up just a tad, Limited Brands (LTD), makes the most sense to be taken over, because it can be easily broken up and is doing fantastically. It is worth speculating on, simply because you have a good valuation underneath. And it won't hurt you if it doesn't get bought and could even help you, as I think it goes higher.

 

I would love to be more bullish, but only J. Crew fit the pattern of a large shareholder and CEO who is sick of being public and knows the company has a bright future that isn't reflected in the current prices.

 

At the time of publication, Cramer had no positions in stocks mentioned.

 

Jim Cramer is co-founder and chairman of TheStreet. He contributes daily market commentary for TheStreet's sites and serves as an adviser to the company's CEO.

 

Follow Cramer's trades for his Charitable Trust.

 

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