Stitching the Cloth!

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

With the oncoming holiday selling season, when people across the globe will be immersed in celebrating Christmas and New Years, it would be interesting to understand and review an apparel portfolio and get insights into the stocks that build it up.

Most of us are aware that the apparel industry houses diverse range of segments, and hence to avoid any confusion, I would specifically be looking at the clothing segment and the stocks that fall there.

Abercrombie & Fitch (NYSE: ANF) witnessed a surge in its share price after it posted strong third quarter results.  This is attributed to an increase in both international and domestic demand.  Commendable pricing strategies during the recession, combined with better management of inventory to suit the ongoing fashion trends, paid off in stronger quarterly results.  Healthy revenue numbers for Abercrombie & Fitch have pumped up investor and analyst expectations alike as we proceed to a major part of the fourth quarter.

Abercrombie & Fitch reported an increase of 41% from an income of 50.9 million, or $0.57 per share last year to $71.5 million, or $0.87 per share this year. The company is aware of the recession slowing down store sales for most of the apparel retailers, and has taken a break in its expansion plans for better management of inventory.

American Eagle Outfitters (NYSE: AEO) displayed strong performance in its last results for the second quarter, with earnings of $0.21 per share, which surged nearly 62% from last year’s reporting period. Adjusted net sales increased 11% year over year to $739.7 million, beating the estimate of $738 million. Though Hurricane Sandy impacted the October sales for most of the store-operated chains, the outlook for the rest of the winter season remain positive. The company is scheduled to release it next earnings on Nov. 26. The company has created a mark in innovating its products to sync with ongoing fashion demands.

American Eagle has been consistent in adding value, as it has generated more than sufficient cash flows during the year.  The company is currently trading at a P/E ratio of around 25, which is in line with the industry average, showing that it is not overvalued and should move towards the upside in the coming quarters.

Aeropostale (NYSE: ARO), in comparison to Abercrombie & Fitch and American Eagle Outfitters, sits on a lower market cap, and has a weaker international presence as well. Even though it's a smaller player, the company has sustained the impact of the recessionary trends by confronting it with effective price mix and better management of inventory levels.  The recent purchase of GoJane.com for an undisclosed sum will add value to the business, enhancing the brand presence in cyber space.

The company is scheduled to release its earnings sometime at end of this month, and after the strong results posted by Abercrombie & Fitch, the expectations for Aeropostale have gone up. This is based on the belief that Aeropostale would also have take leverage of the reduction in raw material prices, especially cotton, as was cited by Abercrombie & Fitch. In terms of cash flows, the picture is quite positive as the company sits on close to $150 million in net cash flow.

As Gap (NYSE: GPS) is scheduled to release its earnings soon, analysts are expecting an increase in the third quarter earnings. Recent figures have shown that Gap has gained a better understanding of customer taste and trends, serving them with brands like Banana Republic and Old Navy. For the most recent quarter, ended July 28, net sales saw a jump of 6% and diluted EPS increased 40% on a year over year basis.

Gap is one of the largest players in the apparel industry, with a market cap of around $16 billion and an international presence across  Canada, Asia-Pacific, Europe, the Middle East, and Africa. The company has enhanced its sales by offering various discount offers and fashionable merchandise for men, women, and kids. The company has a well-placed cyber space strategy as it continues to serve its customers with novel products both online and offline.

Conclusion:

A key metric that gives a good understanding of performance of the store-operated chains is sales at stores open at least a year, as this does not include results from stores recently opened or closed, which can skew performance metrics. For most of the companies in this industry, sales at stores open at least a year have been positive and shown single digit growth.

The apparel industry has shown signs of improvement in the last few months as the companies have got more sense about customer preferences. Thoughtful price wars along with quicker responses to changing customer demands have played a key role in upping the numbers. Momentum is expected to continue as the holiday season approaches. 


MihirMehta has no positions in the stocks mentioned above. The Motley Fool owns shares of Aeropostale. Motley Fool newsletter services recommend American Eagle Outfitters and Gap. 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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