One Retailer for the Long Haul
Joshua is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The fashion industry is known for fads and trends. The Buckle (NYSE: BKE) sells a variety of clothing to young adults and it works hard to maintain its corporate strategy. The firm's focus on the Midwest may appear like a low growth idea, but it has helped Buckle to post strong margins and a high return on investment.
American Eagle Outfitters (NYSE: AEO) is a strong brand that is known throughout the world. It has recently expanded into the Philippines through an agreement with a local partner. Growth is always a hot commodity, and American Eagle is trying to grow wherever possible.
The company's dividend is rather concerning. Its current dividend ratio of 206% shows the dividend is using all of the firms' earnings and more. The company has a five year dividend growth rate of 22.18%, but their five year revenue growth rate is only 1.64%. With their dividend growing faster than earnings and revenue, it appears that American Eagle may be digging themselves into a hole in order to satisfy short term, yield-seeking investors.
Aeropostale (NYSE: ARO) is stuck between a rock and a hard place. Their main customer demographic is price conscious teenagers. Aeropostale's problem is that many of these price conscious customers can easily shop in large discount retailers like Wal-Mart. The more fashion conscious customers are benefiting from the recovering economy and upgrading to better known brands whenever possible.
The company is also eying international expansion as a key to growth. The company has growth plans in Columbia, Turkey, and Panama. This expansion should help to counteract the negative growth seen over the past couple years. The firm's five year EPS growth rate of -6.27% is far from encouraging. Their current return on investment of 15.1% is just average while their profit margin of 2.6% is very low and makes Aeropostale a company that is best avoided.
Urban Outfitters (NASDAQ: URBN) is the biggest firm out of the four companies mentioned here. Success can be a curse. Urban Outfitter's strong growth has forced it to branch outside of fashion in order to keep growing. Their Terrain brand is operates in the home and garden segment. There are similarities between this market and Urban Outfitters' traditional fashion market, but it looks like the need for growth may be going too far.
Urban Outfitters has a five year revenue growth rate of 11.95% and a five year EPS growth rate of 7.05%. These numbers are strong, but they have driven the firm's valuation to a current P/E ratio of 29.40. With such high valuations and interesting expansion plans, it is best to hold off investing until the firm's growth pans out.
Buckle is similar to the other stores mentioned here, but the numbers show that it is something special. Its return on investment of 35.50% is significantly higher than that of their competitors. The company uses an innovative inventory system that brings in product very frequently. By replacing inventory often the company is able to maintain a better handle on demand and strengthen the feedback from their network of 440 stores.
Their profit margin of 14.5% is significantly better than their competitors. The company is currently trading at P/E ratio of 12.9. This valuation is very low and makes Buckle and even better deal when compared to its expensive competitors.
The specialty retail industry is simple and very competitive. Buckle has strong margins and uses their assets very effectively. Also, their small size means that it is not forced to lookout side of their core retail experience in order to find growth. Buckle is not very well known, but it is a good investment.
MrCanadian1 has no position in any stocks mentioned. The Motley Fool recommends The Buckle. The Motley Fool owns shares of Aeropostale and The Buckle. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!