Are These Clothing Retailers Attractively Valued?

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As 2012 neared its end, the market eagerly awaited signs of whether the holiday shopping season was a good one.  Investors were spooked when, in late December, a MasterCard SpendingPulse survey showed that spending increased less than one percent this year.  The results were largely taken as a disappointment, as prevailing expectations were for higher growth.  Many culprits were attributed to the lackluster sales data, including the fiscal cliff negotiations and Hurricane Sandy.  Now, with the holiday shopping season in the books, should the clothing retail industry be shunned?  Or, on the other hand, are there better reasons to be optimistic about these retailers?

One positive note for investors is that despite the disappointing sales report, shares of many clothing retailers showed resilience during 2012.  Macy’s (NYSE: M), American Eagle (NYSE: AEO), and The Gap (NYSE: GPS) rallied 15%, 45%, and almost 75%, respectively.  Clearly the market was pleased with the underlying performance of these three companies, which was in fact fairly good.  Macy’s and The Gap’s reported net sales increased 3.7% and 6.5%, respectively, during the first three quarters of the year.  American Eagle performed even better, with revenues climbing slightly more than 11% during the same period versus a year ago.

What might account for the market shrugging off the MasterCard survey?  First, it’s worth noting the importance of not relying solely on one set of data.  The MasterCard survey, while influential, is in fact just one survey.  The National Retail Federation estimated spending growth of slightly more than 4% during the holiday period.

What’s An Investor To Do Now?

Which data survey is the correct one remains to be seen.  For now, investors interested in the clothing retailers can at least take some comfort in the fact that shares of many of these companies aren’t egregiously valued.  These companies generated solid cash flows over the past year and now are trading at decent multiples of those cash flows.  Macy’s, American Eagle, and The Gap trade at enterprise values to earnings before interest, tax, amortization and depreciation (EBITDA) multiples of 5, 7, and 6, respectively.  Moreover, the financial position of each of these three retailers is sound.  Macy’s, American Eagle, and The Gap all hold long-term debt to equity ratios under 50%.

In addition, all three stocks provide an income cushion by paying dividends to their shareholders.  Each of these three stocks yields roughly 2% at recent prices.  In addition, these three retailers have demonstrated a clear intention of increasing their dividends regularly.  Both Macy’s and American Eagle doubled their payouts during 2012.  The Gap, meanwhile, increased its dividend by 11% in 2012 and has a five-year dividend growth rate slightly higher than 9% compounded annually.

The Bottom Line

Whether the disappointing retail sales figure was an outlier remains to be seen.  As of now, the market hasn’t been too concerned, as share prices of these three stocks performed admirably over the past year.  The operating results over the first nine months of 2012 were solid as well.  Each of these three companies will report the crucial holiday sales figures over the next two months.  Investors would be wise to pay close attention to those results. 

Robert Ciura 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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