Teen Fashion Retailers: Two Buys, Two Holds and One Sell
Andrés is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
In the following table we compare some financial statistics for five fashion retailers targeting young people and teenagers: Urban Outfitters (NASDAQ: URBN), Abercrombie & Fitch (NYSE: ANF), Guess (NYSE: GES), The Buckle (NYSE: BKE) and Aeropostale (NYSE: ARO). The numbers tell an interesting story, and they can help us identifying candidates to buy, hold or sell.
Abercrombie & Fitch looks like the company to avoid in the sector -- its expensive products used to be considered cool by young people some years ago, but that doesn't seem to be the case anymore. Earnings and sales have been lagging the industry in the last five years, and profitability ratios are below those of the competition. At a P/E of 28 Abercrombie is more expensive than comparable companies, so a long position in this stock wouldn't make much sense unless you are expecting a turnaround in the business.
Unfortunately for Abercrombie bulls, that doesn't seem to be the case. The company reported earnings on Wednesday and it disappointed investors with lower than expected sales figures. Management says the worst is over for this company, but they have been saying the same thing for a long time, and they don't deliver results. If the brand is losing value, investors in Abercrombie may be facing a very dark future.
Urban Outfitters and Aeropostale have many things in common. They have produced similar growth rates in earnings and sales during the last five years, although Urban Outfitters has a higher operating margin. Aeropostale comes out ahead when comparing Return on Equity ratios. Also, none of them looks outstandingly cheap at a P/E ratio of 22, so I wouldn't sell these stocks, but I don't see them as especially attractive either.
Guess might be an interesting play from a contrarian point of view -- the company provided weak guidance last quarter and shares have been falling continuously since then. Management is concerned about the effects on the European crisis over the coming months; since Guess makes nearly 40% of sales in the Old Continent it's quite exposed to macroeconomic jitters in Europe.
On the other hand, Guess has delivered very strong growth numbers in recent years, and the company has profitability ratios that compare favorably with other businesses in the industry. This is a high-quality company that will probably be challenged by macroeconomic problems in the middle term, but is solid enough to successfully sail through the storm. At a P/E ratio of 9 Guess is the cheapest stock in the group and it's an interesting possibility for long-term investors with a contrarian philosophy.
The Buckle has a lot of interesting things to offer investors. It's the company with the highest growth and profitability ratios in the group, and it's trading at a very moderate P/E of 13. The company reported earnings on Thursday, and there seems to be no slowdown at sight for this retailer of casual apparel for young people.
The Buckle reported a 13% increase in net income for the quarter, earnings per share increased to $0.79 versus $0.71 in the same quarter of previous year, which was above expectations of $0.76. Sales grew at a 10%, backed by a 7.4% increase in same store sales and a 15% growth in online revenue – which is not included in same store sales.
The Buckle doesn't only have the best track record among the five companies analyzed, it is also firing an all cylinders in an economic environment that is quite challenging for retailers. Combining that with a very reasonable valuation ratio, it looks like this company is positioned to outperform the markets in the middle term.
acardenal has no positions in the stocks mentioned above. The Motley Fool 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.If you have questions about this post or the Fool’s blog network, click here for information.