Hot and Cold Apparel Retailers
Andrés is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Fashion is a tricky business; it can be very profitable when you are correctly positioned to benefit from emerging trends and customers like your brand and designs. But when a brand or a retailer is not considered cool anymore, the company could be in serious trouble. A good image is a very important asset in the clothing business, and once you lose it to competition it can be really hard to recover.
For that reason, I believe it's better to stay with the companies that are doing well and avoid those that are showing problems. Maybe you can miss some undervalued companies having transitory problems with this approach, but in the long term I think it's safer to follow the trends than trying to discover which fashion retailer will recover from its problems and make a nice comeback. Consumers can be hard to predict in this sector, and I don't believe playing the guessing game is the smart approach.
Limited Brands (NYSE: LTD) is the parent company of Victoria's Secret and Bath & Body Works Brands, and has been reporting some sexy results lately: same-store sales rose 9% in January, strongly surpassing analyst estimates of a 2.7% increase. The company has been doing much better than many of its peers -- the last quarter showed a 10% increase in sales, driven by a healthy increase of 9% in same-store sales. This translated into a remarkable growth of 39% in earnings per share as the company also increased profit margins.
Over the last four quarters Limited Brands has positively surprised analysts by reporting better than expected earnings and the company recently raised its annual dividend by 25% from $0.80 to $1.00, which implies a nearly 2.3% dividend yield at current prices. The company is executing successfully and is not expensive at all, trading at a P/E ratio bellow 15.
Ross Stores ) is another company performing well in this sector. Over the last year shareholders enjoyed a return of almost 50% as the company got strong benefits from its position in the low-price segment, becoming quite popular among bargain hunters. Ross Stores reported a 5% increase in same-store sales for January versus an estimated increase of 3.7%, so it looks like this off-price retailer will keep growing in the middle term.
Ross Stores has reported solid growth in sales and earnings, and dividends have also been increasing regularly over the last years, although dividend yield is still quite low at 0.9%. The company is more expensive than most competitors with a P/E ratio of almost 19, but it also has superior growth prospects. This low pricing strategy should hold pretty well in adverse economic scenarios so risk could be lower from that perspective.
Zumiez ) is a mall-based retailer of actions sports apparel that has been reporting very strong numbers: same-store sales for January increased by 10.8%, which is much better than analyst estimate of a 4.3% increase. The company has also reported better than expected earnings over the last four quarters, but unfortunately looks a bit expensive trading at a P/E ratio of 26.8. I believe it's better to wait for a pullback trying to get lower valuations in this case.
The Buckle ) also reported better than expected same-store sales for the month of January with a 7.4% increase compared to an average estimate of 7.3%. Performance has been really outstanding for many years now, as this retailer of fashion apparel for young people managed to increase sales and earnings even during the financial crisis in 2008 and 2009.
A company that can perform well in different economic environments is not something you see every day among teen retailers. The fact that The Buckle is doing better than its competitors is particularly interesting since it implies it's gaining market. Dividend yield is at a modest 1.8% but has upside potential considering the company's financial performance; at a P/E ratio of 14.3 The Buckle seems reasonably priced.
One company I would avoid is Abercrombie & Fitch ). This teen retailer used to be really hot among consumers, selling for higher prices than most competitors and achieving superior profit margins. But nowadays it seems to be losing its status and it's really hard to tell if teenagers will ever consider Abercrombie's brands a desirable product again.
The company announced preliminary fourth quarter results that were much lower than estimates: "Our sales for the quarter were below expectations in a highly promotional environment, and our results were further affected by all-time high cotton costs," Abercrombie Chief Executive Mike Jeffries said. "We remain cautious on near-term sales trends; however, we are confident that we are on track with our assortment and our long-term strategy, and hope to see improvement as 2012 progresses." Abercrombie could be a buying opportunity from a long-term perspective, but that bet looks too uncertain.
The Motley Fool owns shares of Limited Brands Inc. acardenal has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.