Friday, January 12, 2001

Stock Focus: Companies With Lower Labor Costs

NEW YORK - The unemployment rate may have held steady at 4% for the month of December, but that hasn't stopped the parade of grim headlines announcing job cuts at old- and new-economy companies such as Ameritrade, eToys, Fox, General Motors, Lockheed Martin, Sears and Xerox.

Is there a silver lining in the cloud of pink slips? "Some industries have been hurt by tight labor markets but, by their very nature, haven't been able to benefit from the technological revolution that has offset higher wage costs," says Fran├žois Trahan, equity strategist at Brown Brothers Harriman. In particular, says Trahan, this has impacted sectors relying heavily on minimum-wage labor.

San Diego-based retailer Factory 2-U Stores (nasdaq: FTUS - news - people) is one of many retailers that could benefit from a cooling labor market. This company, which operates off-price stores in seven Western states, has traditionally found its hiring efforts hampered by larger competitors offering superior incentives.

Factory 2-U's forward earnings multiple stands at 21, versus 26 for the retailing industry. The company is projected to post a relatively robust 28% average annual earnings growth over the next three to five years. "They are at their infancy in terms of growth," says Annie Erner, vice president and retail analyst at Salomon Smith Barney.

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