3 Classics to Buy, 2 Fads to Avoid
Jonathan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
It has been said that, "Good taste never goes out of style." For that reason, Coach (NYSE: COH), Ralph Lauren (NYSE: RL) and The Gap (NYSE: GPS) will rebound. For True Religion (NASDAQ: TRLG) and Crocs (NASDAQ: CROX), it is a different matter.
Things become classics for a reason. A Jaguar XKE Roadster still turns heads even though it is a car that came out in the early '60s. It is hard to go wrong with a blue blazer or a black cocktail dress hanging in the closet when casual wear will just not suffice for the occasion. Tough to imagine that being said about a pair of Crocs shoes or True Religion jeans.
The apparel and related items offered by Ralph Lauren, Coach and The Gap are more than just clothes and fashion accessories, they are lifestyle choices. The appeal of these products has flourished through the test of time. Ralph Lauren has been around for decades, founded in 1967. Coach was founded in 1941 and now has hundreds of stores and other facilities located around the world. Operating since 1969 from San Francisco, many of the customers of The Gap may wear its clothes to an Eagles concert, but that is a demographic that will be there forever, no matter how relaxed the fit needed for the jeans and khakis.
By contrast, Crocs is barely a decade old, founded in 1999. That makes it venerable compared to True Religion, created in 2002. The stock trajectories of both True Religion and Crocs demonstrate that each is fad apparel wear, rather than a classic line of clothing and accessories as the products are priced at the high end.
Pointing to this is the wild price swings for each. In 2007, Crocs was over $70 a share. In 2009, it was around a $1. Now it is at $16. True Religion was at over $36 in January. It is now trading around $21.
Both have very high short floats. A short float of 5% is considered to be high for a company. The short float for True Religion is 9.73%. For Crocs, the short float is 7.82%. By contrast, Ralph Lauren has a short float of 3.57%. For The Gap, the short float is 4.75%. The short float for Coach is 4.92%.
The trends certainly explain the high short floats for True Religion and Crocs. At True Religion, earnings-per-share growth for the quarter is just 2.48%. That is below the yearly rate of 2.66%, which is tepid. These are below the five year mark of 14.30%. Sales growth for the quarter is also below the five-year pace.
It is much the same for Crocs. The quarterly sales growth of around 10% is well below the mark for the year. In addition, the quarterly sales growth of 11.96% for Crocs is almost half that of 23.06% for the last five years.
Falling earnings-per-share growth and falling sales growth are disturbing trends for both Crocs and True Religion, and indicative of faddish apparel.
Coach is particularly appealing for bullish trends as its men's business doubled last year with sales in China growing by 60% a year. Earnings are up 18% and a double-digit profit growth is forecast. For Ralph Lauren, earnings-per-share growth is up on a quarterly basis by 33.43%. For the same period, earnings-per-share growth is rising for The Gap by 19.03%.
Ralph Lauren, Coach and The Gap will also benefit more from international growth. The Gap has stores in more than 90 countries. Coach has hundreds of stores and operations in 20 countries. The polo pony logo of Ralph Lauren is known around the world. By contrast, True Religion has stores in six countries.
According to the Thompson-Reuters/University of Michigan survey, consumer confidence in the United States is low. That happens when unemployment rises to 8.3% and economic growth falls to 1.5%, despite trillions in additional debt and a failed stimulus package of close to one trillion dollars. With these confluence of factors, consumers become very risk adverse. High priced faddish clothing like that from True Religion and Crocs are early casualties in harsh economic conditions as buyers will stay with the classics. For investors that is an appropriate strategy for the retail sector in this market.
jonathanyates13 has no positions in the stocks mentioned above. The Motley Fool owns shares of Coach and Crocs. Motley Fool newsletter services recommend Coach and True Religion Apparel. 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.