Crazy Like A Fox Retail Stocks
AnnaLisa is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Moms only have to wait three more weeks until the dancing in the streets officially commences with the kids finally out of the house. The crazy back to school season is in full swing for retailers, and its importance is second only to the holidays as a make-or-break period for these companies.
One store that was surprisingly busy at the mall last weekend was Abercrombie & Fitch (NYSE: ANF), with a long line at the checkout counter contrasting sharply with other retailers. At a PEG of .98 it is fairly valued and offers a 1.50% yield. It operates 1,053 stores representing four brands: Abercrombie & Fitch, Gilly Hicks, abercrombie kids, and Hollister, with roughly a third of these located in international markets.
CEO Michael Jefferies has been the lightning rod of adverse press this year with well publicized rehashings of his exclusionary brand philosophy and details of his strange fiats. But with improving numbers he may end up with the accolade of "crazy like a fox" rather than "how weird is this guy."
The company presented a compelling picture of improving profitability at the Jefferies Global Consumer Conference in June, with gross profit as a percentage of Q1 sales coming in at 65.9% in 2013 to 58.7% in Q1 2012. Net loss per basic and diluted share also decreased from $0.25 to $0.09.
This is a very competitive space, and Abercrombie competes against Aeropostale, The LTD's Victoria's Secret PINK collection, Gap, The Buckle, and Urban Outfitters (NASDAQ: URBN), to name a few. Failure is not an option with rival American Eagle diving 14% after disappointing.
Abercrombie has made considerable progress on each brand's websites with direct to consumer representing 16% of total company sales and its database from social media, websites, mobile, and e-mail has over 10 million contacts. The company just launched an iPhone app for Abercrombie & Fitch stores in its ongoing mobile commerce drive.
A beautiful call
Another company associated with a famous eccentric is Steve Madden (NASDAQ: SHOO). In 2010 the company bought out bankrupt designer Betsey Johnson, famous for her funky and eclectic designs and for turning cartwheels on the catwalk (she's over 70 now).
The purchase of this brand and possibly more successful purchases like it helped prompt Goldman Sachs to upgrade the name from a Sell to a Buy with a $69 price target on Aug. 5, sending the stock up almost 5% intra-day to its all time high of $55.99.
Their ticker may read SHOO, but Steve Madden is branching out from shoes and accessories using Betsey Johnson as a platform, launching a fragrance, luggage line, and dresses this year. CEO Edward Rosenfeld said, "We feel Betsey should be generating between $15 million and $20 million of royalty income net expenses over the next few years." Betsey is also going global with stores opening in China.
The company owns 113 stores, three of them e-commerce focused. The other 85% of the business is direct-to-merchants like Target and Neiman Marcus. The company has $290.13 million in cash and no debt.
The company reported Q2 results on Aug. 1 with a 110 basis point gain in gross margin now at 37.2%, net income up 8%, and the opening of two full-price Steve Madden stores and one outlet. Stores are generating $909 in sales per square foot.
On the Q&A, booties and bags and Betsey were the big questions and CEO Rosenfeld assured analysts sales have been brisk in those three categories despite weather and other excuses put forth by competitors such as Decker's. The company added that handbags at the $100 price point are moving well against the much higher priced Michael Kors and Coach bags.
Steve Madden bought back 456,000 shares at an average price of $47.46 in the quarter, with another $125 million left to buy. The Goldman Sachs analyst did ask about the possibility of a regular dividend, and it wasn't ruled out. The company has a history of special surprise dividends. This was another reason Goldman upgraded the name. The company trades at a trailing P/E of 19.99 with a PEG of 2.43.
Quirky, edgy, and cool
Urban Outfitters is another unique, eclectic retailer that's outperforming thanks to a huge direct-to-consumer push. Its websites are undeniably edgy and fashion-forward, and online sales rose 31% in 2012. Eventually Urban expects online to make up fully half of its sales. The company was included in Jim Cramer's Lifestyle Index this spring for its undisputed coolness.
Its clothing and home accessories target trendy young men and women. Brands include Free People, Beholdn (hip wedding clothes), Urban Outfitters, Terrain (home and garden), and Anthropologie, for a combined total of 475 stores.
The stock is up 45% this last year and it trades at a 25.58 P/E, with no debt and $379 million in free cash. Analysts like the name, expecting 15.72% five year EPS growth year over year. Sun Trust initiated coverage with a Buy in July.
Method to their madness?
With back to school and the holiday season coming, these are three intriguing stocks. Abercrombie & Fitch is becoming a turnaround story, but is the least recommended of the three. Steve Madden is at 52-week highs and although I agree with Goldman that it's a buy, just not a buy right here. I like the niche that Urban Outfitters has carved for itself and think it will continue to rock your world (and portfolio).
The retail space is in the midst of the biggest paradigm shift since mail order took off at the turn of last century. Only those most forward-looking and capable companies will survive, and they'll handsomely reward those investors who understand the landscape. You can read about the 3 Companies Ready to Rule Retail in The Motley Fool's special report. Uncovering these top picks is free today; just click here to read more.
AnnaLisa Kraft has no position in any stocks mentioned. The Motley Fool recommends Urban Outfitters. 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!