Time To Buy This Clothing Company?

Cecil is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

In an industry where competition is fairly intense, there are a few companies that are doing well. The clothing industry is a fairly fickle industry in the sense that consumer tastes and preferences change fairly often.

Abercrombie and Fitch (NYSE: ANF), an apparel and lifestyle brand operating mainly in the United States, with expanding branches and stores in both Europe and China. Abercrombie is one of the leading specialty retailers of premium casual apparel in the U.S. The company has a strong portfolio of well-established brands.

The company has a fair sense of where it is headed with new products. It has moved from making tops to more denim products. The company has also been manufacturing yoga accessories and apparel, which is for regular consumers, rather than the average fickle minded teenager. Working under brand names of Hollister, Gilly Hicks, Abercrombie Kids, and Abercrombie and Fitch, A&F already has 1,045 stores operating in North America, Asia, and Europe. In a harsh environment, the company is prepared to take steps to face their challenges. The company has closed its underperforming US stores and is ramping up the development of its Abercrombie Kids and Hollister store concepts.

How does the competition stack up?

American Eagle Outfitters (NYSE: AEO) is a brand that competes with Abercrombie and Fitch’s Hollister brand. The company is essentially a teen retailer that has seen its stock fall 14% in less than three weeks. The recent decline in stock price is attributed by Evren Kopelman of Wells Fargo as "a result of the company not at least guiding to the high end or raising third quarter guidance." AEO’s fiscal year guidance is now between $1.33 and $1.36 per share.

Another reason why the stock declined recently is thanks to Aeropostale and its recent troubles. The logic behind this being that since American Eagle is one of the primary competitors for Aeropostale, they may face the same problems. However, they are completely different companies and Aeropostale appears to be in a bit of disarray, so it’s a bit like comparing Apple and HP. If anything, that failure is bullish, not bearish, for AEO, which is seeing a key competitor left behind.

GAP (NYSE: GPS) is a company whose stock price, has soared more than 80% since the beginning of January, making it one of the best-performing stocks in the S&P 500.

The company has been closing stores in the US and going in for a period of stabilization in order to ensure efficiency after over expanding. The company is also looking at growth prospects in emerging markets after entering China. GAP also plans on entering the Indian market pretty soon. A big part of the company’s blockbuster performance is due to their ability to nail key fashion trends. Its Banana Republic division launched its “Mad Men” collection to coincide with the return of the hit cable television series to the air.

However, many investors are staying away from GAP because of its high valuation reflected in P/E Ratios. The company isn’t as clean as its competitors either with debt to equity ratios of .556. However, the higher valuation is on the mind of most investors, and this is why they have been staying away from GAP.

Summary

In terms of valuation, ANF trades at just a 0.6x P/S multiple and 1.41x P/B in comparison to peers Urban Outfitters’ (URBN) 4.89x P/S and 2.10x P/B and Guess’ (GES) 1.85x P/BV and 0.77x P/S. This is a clear indication that ANF shares are cheap and the market has below-average expectations of future outperformance.

The company has a very healthy and nearly debt-free balance sheet with cash and cash equivalents of $321.6 million and long-term debt of only $65.7 million at the end of the first quarter of fiscal 2012 bringing flexibility that is required to drive growth.


ceciljohn2002 has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend American Eagle Outfitters and Gap. 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.

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