Which Clothing Retailer Is The Best Investment, If Any?

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

With the general direction of the market being to the upside over the past year or so, there is one area that has been plagued by disappointing earnings numbers and declining share prices.  I’m talking about the clothing industry, with household names such as Abercrombie and Fitch (NYSE: ANF) and Limited Brands down from where they were a year ago.  Abercrombie seems to have been on a roller-coaster ride lately, with shares peaking at over $80 in 2008, falling to under $14 later that same year, rising to the $80 level again in 2011, and plummeting again to as low as $28.64 in 2012.  Just this year, there have been violent price swings in Abercrombie, and I’m quite frankly not interested in that kind of volatility in my long-term portfolio.

I’d like to take a look at three names that are set to report earnings in the coming weeks, and try to get a feel for the direction of the sector.  In no particular order, we have:

1.)    Guess? (NYSE: GES) – Over the past year, Guess has declined from the $37 range to just over $27, where it is trading currently.  Guess sells its products through retail, wholesale, e-commerce, and licensing distribution channels in 87 countries, primarily targeting men and women between the ages of 18 and 32.  The company has steadily increased its revenues over the past several years, however due to declining margins earnings have not kept up, hence the declines in share price.                                                                                                                                                                

Despite the challenges facing the company, such as the retail conditions in Europe where about 24% of the company’s stores are, consensus estimates call for earnings to increase again, by an average of 10% annually for the next several years.  Since the stock trades at just 13.4 times forward earnings and the company has an excellent balance sheet with about half a billion dollars in cash and virtually no debt, this one may be worth a look! 

2.)    Aeropostale (NYSE: ARO) – This one was trading as high as $23 in early 2012, a far cry from its current $12.53 price tag.  Aeropostale has suffered several disappointing quarters lately, including poor holiday results, and earnings dropped from $2.59 in fiscal year 2011 to $0.90 in 2012.  Aeropostale caters to a slightly younger crowd than Guess, targeting mainly the 14-17 year old crowd with its value-priced, active-oriented apparel.

Although results have been poor lately, Aeropostale is taking measures to right the ship through investments in fashion as well as beefing up efforts in marketing and in-store presentation.  While earnings are expected to fall even further this year to 66 cents per share, earnings are expected to rise by 50% over the next two years to $1.00 per share.   Aeropostale is a slightly higher risk than Guess, however with greater risk comes greater potential reward.  If Aeropostale is successful in its efforts, it is not inconceivable for earnings to climb back into the $2.50 per share range, which would make this a $30 stock easily. 

3.)    American Eagle Outfitters (NYSE: AEO) – This is one of the few clothing retailers that is actually up over the past year, from $14 to around $20 currently.  American Eagle was “fortunate” in that it experienced greater declines during the 2008-09 recession than its peers, and was forced to revamp its business a few years ahead of the rest, investing large amounts of their resources in developing new and exciting apparel and accessories.  The difference between American Eagle and the others is that there is a clear upswing in earnings and revenues, which is why the shares have increased so much.  American Eagle trades at 14.4 times forward earnings, and has an even better balance sheet than the other two, with $745 million in cash and no debt.

Conclusion

To sum it up, American Eagle Outfitters seems to be the safer and more practical long term investment of the three.  I like how they have already shown the market that their efforts to improve their business have been effective and they still trade at a very modest valuation.

While it is true that investors could be handsomely rewarded from an investment in either of the other two names mentioned here, it seems like an unnecessary risk with attractively-valued alternatives like American Eagle Outfitters.


KWMatt82 has no position in any stocks mentioned. The Motley Fool recommends Guess?. The Motley Fool owns shares of Aeropostale and Guess?. 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!

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