Three Hidden Gems in Teen Retail

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

The teen retail space is one that initially appears lucrative, but is actually fraught with risks.

Although teen shoppers are some of the most active shoppers in the world, they are also the most fickle. What might be cool one moment might be dated the next. Therefore, teen retailers need to constantly keep in touch with the constantly shifting opinions of teens, via social media and market studies. There are retailers that have failed miserably, such as Abercrombie & Fitch and Aeropostale. Others, such as Urban Outfitters, have stayed in touch with teen demand with kitsch and unique items, and reaped the benefits.

However, there are three companies under the radar which think investors should also pay attention to - Five Below (NASDAQ: FIVE), Wet Seal (NASDAQ: WTSL) and The Buckle (NYSE: BKE). All three companies have performed incredibly over the past year, outperforming the market by a wide margin.

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Five Below

Five Below is a relative newcomer to the sector, making its public debut last July with an IPO price of $17. Shares have more than doubled since then. The company first opened in 2002, selling a huge assortment of female teen-centered products, such as party supplies, cheap iPhone cases, nail polish, jewelry, accessories, sunglasses and humorous printed T-shirts. It also sells room furnishings, such as glitter lamps, posters, fleece blankets and incense. The appeal of Five Below is its price range - all of its products are priced between $1 to $5, making them easily affordable for its target demographic.

That simple, efficient business model earned the company $0.05 per share last quarter, a penny above the consensus estimate. Revenue rose 33.1% year-on-year to $95.6 million, topping the $94.23 million that analysts had expected. Same-store sales rose 4.2%.

Although Five Below has a tiny footprint of 258 stores, the company added 14 new stores during the first quarter and intends to add 60 more locations during the year, concentrating heavily on the Dallas and Austin areas in Texas. I believe that Five Below has room to grow due to its pricing strategy and wide assortment of products. Five Below’s constant rotation of lower-priced products to keep things fresh is a tactic that has worked well for teen apparel retailers Forever 21 and H&M.

Wet Seal

In a previous article, I mentioned that teen apparel retailer Wet Seal was a hidden gem, since its growth potential isn’t immediately apparent by looking at its traditional growth metrics. Last quarter, Wet Seal’s adjusted earnings fell to a penny per share, down from 2 cents in the prior year quarter. Its revenue fell 5.1% to $140.4 million as its same-store sales declined 3.4% and 0.9% at its Wet Seal and Arden B stores, respectively. The company currently operates 464 Wet Seal locations, which caters to juniors, and 62 Arden B stores, which offers more contemporary, feminine apparel for slightly older customers.

The bright side of Wet Seal’s quarterly earnings is its same-store sales decline of 2.9%, which was a dramatic improvement over the 7.7% decline it reported a year earlier. E-commerce sales also rose 6.8% to $6.5 million, accounting for 4.6% of the company’s top line. Operating income also increased to $3.2 million, a big improvement over the operating loss of $0.4 million a year earlier.

More important, after facing tremendous pressure from activist investor Clinton Group, which owns 6.9% of the company, Wet Seal reshuffled its management team on multiple levels earlier this year. Most important, the board appointed John D. Goodman, a former Gap Inc. and Levi Strauss & Co. executive, to the CEO post. It also appointed former Bebe Stores executive Tamara Chamberlain as the President of Arden B. The company’s first quarter results indicate that this reorganization has been having the desired effect on turning around its lagging top and bottom line growth.

The Buckle Inc.

The Buckle, which was founded in 1948 and went public in 1992, is another name that is often overlooked by investors in teen retail. The company was once a men’s clothing store, which evolved into a denim-based store, which later started offering women’s apparel as well. Today, Buckle offers apparel for kids, juniors and adults.

Last quarter, Buckle earned $0.78 per share, or $37.6 million, down slightly from the $0.79 per share, or $37.8 million, it reported in the prior year quarter. Revenue rose 2.3% to $269.7 million as same-store sales climbed 1.2%. Online sales rose 6% to $20.9 million.

Although these numbers are not particularly impressive compared to the rest of the retail apparel industry, its growth over the past five years is quite impressive when compared to similarly diversified retailers, such as American Eagle Outfitters.

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Therefore, Buckle has an advantage over many of its industry peers - slow and steady growth in a highly macro-dependent sector.

The Foolish Bottom Line

Five Below, Wet Seal and Buckle offer three different approaches to the teen and young adult market, and each business has its own merits. In closing, let’s compare the fundamentals of these three companies to gauge which is the better investment at current prices.

<table> <tbody> <tr> <td> </td> <td> <p><span><span><span><strong>5-year PEG</strong></span></span></span></p> </td> <td> <p><span><span><span><strong>Forward P/E</strong></span></span></span></p> </td> <td> <p><span><span><span><strong>Price to Sales (ttm)</strong></span></span></span></p> </td> <td> <p><span><span><span><strong>Return on Equity (ttm)</strong></span></span></span></p> </td> <td> <p><span><span><span><strong>Debt to Equity</strong></span></span></span></p> </td> <td> <p><span><span><span><strong>Profit Margin</strong></span></span></span></p> </td> <td> <p><span><span><span><strong>Dividend Yield</strong></span></span></span></p> </td> </tr> <tr> <td> <p><span><span><span><strong>Five Below</strong></span></span></span></p> </td> <td> <p><span><span><span>1.74</span></span></span></p> </td> <td> <p><span><span><span>41.22</span></span></span></p> </td> <td> <p><span><span><span>4.63</span></span></span></p> </td> <td> <p><span><span><span>100.59%</span></span></span></p> </td> <td> <p><span><span><span>45.91</span></span></span></p> </td> <td> <p><span><span><span>5.14%</span></span></span></p> </td> <td> <p><span><span><span>No div.</span></span></span></p> </td> </tr> <tr> <td> <p><span><span><span><strong>Wet Seal</strong></span></span></span></p> </td> <td> <p><span><span><span>1.15</span></span></span></p> </td> <td> <p><span><span><span>21.65</span></span></span></p> </td> <td> <p><span><span><span>0.77</span></span></span></p> </td> <td> <p><span><span><span>-59.36%</span></span></span></p> </td> <td> <p><span><span><span>No debt</span></span></span></p> </td> <td> <p><span><span><span>-19.17%</span></span></span></p> </td> <td> <p><span><span><span>No div.</span></span></span></p> </td> </tr> <tr> <td> <p><span><span><span><strong>Buckle Inc.</strong></span></span></span></p> </td> <td> <p><span><span><span>2.44</span></span></span></p> </td> <td> <p><span><span><span>15.16</span></span></span></p> </td> <td> <p><span><span><span>2.36</span></span></span></p> </td> <td> <p><span><span><span>45.68%</span></span></span></p> </td> <td> <p><span><span><span>No debt</span></span></span></p> </td> <td> <p><span><span><span>14.52%</span></span></span></p> </td> <td> <p><span><span><span>1.5%</span></span></span></p> </td> </tr> <tr> <td> <p><span><span><span><em>Advantage</em></span></span></span></p> </td> <td> <p><span><span><span>Wet Seal</span></span></span></p> </td> <td> <p><span><span><span>Buckle</span></span></span></p> </td> <td> <p><span><span><span>Wet Seal</span></span></span></p> </td> <td> <p><span><span><span>Five Below</span></span></span></p> </td> <td> <p><span><span><span>Wet Seal, Buckle</span></span></span></p> </td> <td> <p><span><span><span>Buckle</span></span></span></p> </td> <td> <p><span><span><span><span>Buckle</span></span></span></span></p> </td> </tr> </tbody> </table>

Source: Yahoo Finance, 7/12/2013

For investors who like exciting, speculative growth stocks, Five Below looks like a solid bet. Meanwhile, Wet Seal should appeal to investors who like a good turnaround story. Last but not least, Buckle is a rarity in the apparel sector - a slow but stable stock which has double digit margins and a decent dividend. Therefore, I believe that these three companies are hidden gems in the retail sector which shouldn’t be overlooked.

Leo Sun has no position in any stocks mentioned. The Motley Fool recommends The Buckle. The Motley Fool owns shares of The Buckle. 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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