Two Summer Retailers to Buy and One to Avoid

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

Summer’s almost here. For shoppers in much of the northern hemisphere, this means it’s time to load up on swimwear and outdoor activewear. For investors, this means that it could be a favorable time to invest in some apparel retailers that specialize in these fashions. However, this sector has been a particularly volatile one over the past five years, and is a tough one to successfully navigate. In this article, I’ll discuss two potential winners and one to avoid in this sector.

The sun shines again on PacSun

For a few years, Pacific Sunwear of California (NASDAQ: PSUN), also known as PacSun, didn’t look like it was going to survive. At the nadir of the financial crisis in 2009, the stock dipped under $1 per share as both its top and bottom lines crumbled. The company operates mall-based beachwear retail stores, and currently operates 643 stores across the United States.

For the first quarter, analysts had fairly low expectations for the company, expecting a loss of $0.19 per share on revenue of $164.22 million. However, Pacific Sun topped on both profit and revenue, reporting a narrower-than-expected loss of $0.14 per share, up from a loss of $0.20 per share in the prior year quarter. Revenue declined 2.3% to $169.8 million.

While its top and bottom line growth weren’t particularly impressive, PacSun’s same-store sales growth of 2%, followed up by its current quarter forecast for “flat to 5%” same-store sales growth, was extremely encouraging, compared to the 15% same-store sales decline that teen apparel bellwether Abercrombie & Fitch reported last quarter.

Some analysts have speculated that Abercrombie’s Hollister brand was falling out of fashion due to its “California style” fashion, but PacSun’s numbers prove that there is still a market for the sunny fashions of the Golden State. In addition, PacSun’s same-store sales growth in the first quarter marks the company’s fifth consecutive quarter of positive same-store sales.

Will Zumiez zoom up or down?

Meanwhile, Zumiez (NASDAQ: ZUMZ), which specializes in skater, snowboarder and surfer apparel, reported some lopsided numbers during the first quarter. The company’s earnings came in at $0.13 per share, a 45% decline from the prior year quarter, but topped analyst estimates by a penny. Meanwhile, revenue rose 14% to $148.5 million. The company attributed its steep earnings decline to rising expenses, especially a 26% rise in SG&A (selling, general & administrative) expenses. Zumiez is in the process of digesting Blue Tomato, a European activewear retailer it acquired last year for $75 million, which weighed down its quarterly earnings by 5 cents per share.

Same-store sales slid 0.7%, a disappointing decline from the 13% growth it reported a year earlier. The company currently operates 505 stores globally, and intends to add 58 new stores during the year.

Zumiez is a tough call. While its same-store sales decline is tame compared to other teen apparel retailers, it is a big drop from the previous year. Meanwhile, the company seems intent on expanding its footprint into Europe, at a time when most companies are limiting their exposure to the entire region. However, Zumiez could stabilize later this year if it manages to report lower expenses and positive same-store sales.

Quiksilver is headed for a bone-crushing wipeout

This brings us to the worst choice of the bunch - Quiksilver (NYSE: ZQK). The surf and sun apparel retailer recently wiped out, after reporting weak second quarter earnings. The company reported a net loss of $0.19 per share, or $32.4 million, a steep plunge from the loss of $0.03 per share it reported in the prior year quarter. Revenue decreased 7% to $458.7 million. Analysts had expected Quiksilver to lose $0.04 per share on revenue of $505.4 million.

Quiksilver’s namesake brand, which accounts for 40% of its top line, reported a 10% decline in sales, due to lower demand for surf, beach and seasonal apparel. Meanwhile, Roxy, Quiksilver’s female brand which comprises 28% of its top line, reported a 4% decline. The only bright spot for the company was DC Shoes, its footwear and skate apparel brand, which squeezed out an anemic 1% gain. Gross margins also declined from 49.2% to 46.0%, indicating higher markdowns in an effort to generate higher sales volume, which apparently failed.

A big part of Quiksilver’s problem is its international exposure. The company is exposed to too many markets at the same time. Although sales in the Americas rose slightly, they were completely offset by steep losses in Europe, the Middle East, Africa and the Asia-Pacific region. Global same-store sales slid 4% as a result of this imbalance in demand.

On the bright side, Quiksilver was able to reduce its expenses substantially during the quarter. Its e-commerce sales, which generate 5% of its revenue, also rose 31%. This indicates that Quiksilver could improve its sales if it streamlines its operations and reduces its brick-and-mortar footprint, especially in overseas markets.

For now, however, investors should avoid Quiksilver, since most of its sales figures are headed in the wrong direction.

The Foolish Bottom Line

Investing in the right activewear retailer can be a tough choice. Investors should take a look at the dire fate of Australian surf and snow apparel retailer Billabong to see what happens when this kind of business model fails. In closing, let’s compare the fundamentals of these three companies.

 

Forward P/E

5-year PEG

Price to Sales (ttm)

Debt to Equity

Profit Margin

Qty. Revenue Growth (y-o-y)

Pacific Sunwear

N/A

N/A

0.29

195.70

-7.48%

-2.30%

Zumiez

16.43

1.11

1.37

0.70

5.83%

14.30%

Quiksilver

27.18

-6.50

0.58

149.12

-2.37%

-6.80%

Advantage

Zumiez

Zumiez

Pacific Sunwear

Zumiez

Zumiez

Zumiez

Source: Yahoo! Finance, 6/11/2013

Of these three stocks, Zumiez has the most stable financials. With solid top and bottom line growth, along with positive margins and the lowest debt, Zumiez could indeed zoom again if its same-store sales start rising again, especially after it stops taking losses on its Blue Tomato acquisition. Meanwhile, Pacific Sunwear is more of a stabilization story than a turnaround one at the moment. Pacific Sunwear is still unprofitable, but its positive same-store sales growth could eventually bring the company back into the black. Lastly, investors should avoid Quiksilver, which has all the earmarks of a failing company. Unless the company can stem its global losses and turn around its namesake and Roxy stores, then it is surfing straight into a tsunami.

The tides of summer retail can be treacherous to navigate. However, there are still some sunny stocks for careful investors who have the patience for longer-term stabilization and turnaround stories.

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Leo Sun has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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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