Top Quality Apparel Stocks to Consider Buying

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The New Year is getting off to a nice start for investors now that the “fiscal cliff” has been resolved, which limits the amount of tax increases that would have gone into effect. Investors can now make more “secure” investments. News from two very well established companies that have outperformed their peers by strategic approaches and marketing gives a glimpse into this year’s top investment opportunities.

American Eagle Outfitters (NYSE: AEO): Expensive but Solid Brand

American Eagle is a very popular and well-known brand in clothing and accessories in the US and Canada, and it holds over 900 key locations and dozens of kids' stores across the world. Their targets are 14-25 year old males and females. Recently, they have focused corporate strategy on releasing products that are meaningfully unique from the competition. With this particular approach, their profits have soared and margins have expanded. Capital expenditures have also decreased from $30 million last year to $23 million this year.

American Eagle’s recent revenue of $910 million also beat expectations by around $40 million, or around 4.1%. They managed to deliver double-digit (10% or more) same-store sales growth, which outperformed mall-based peers. They are now planning to expand their factory locations by 175 to increase production despite the sovereign debt crisis in Europe. Of course, so much production requires more marketing, but American Eagle has delivered historically from its innovative brand appeal.

At a respective 18.5x and 13.1x past and forward earnings, American Eagle is, however, considerably more expensive than peer Gap (NYSE: GPS), which trades at corresponding figures of 15.2x and 12.2x. While the Street is more optimistic about the former, it may be time to consider jumping ship. In mid-November 2012, Canaccord Genuity increased their rating from a "sell" to a "hold." A month later, Standpoint Research did just the same. Ultimately, Gap still generates an impressive free cash flow yield of 7.6% and is forecast 9.9% annual EPS growth over the next five years, around the same amount that was achieved in the past five years. So, while American Eagle's brand has been flying like an eagle, Gap is likely to see its own "air lift" soon.

Why You Should Also Consider Buying Nike (NYSE: NKE)

Like American Eagle, Nike has also done well in corporate strategy. Its FQ2 performance exceeded expectations on all lines and beat internal guidance. Expectations were beaten domestically, although performance in China and Europe was not so good. Success, unfortunately, was partially achieved through profitability erosion. Nike managed to reduce its gross profit margins to a historical low by passing aggressive savings onto shoppers.

In recent months, Nike won a guarantee from Oregon legislators, who explicitly clarified that its current taxes won’t change if Nike agrees to add around 500 jobs by 2016. Surrounding states are prepared to offer even better deals. They even managed to make the state’s legislature hold a special meeting dedicated to this matter.

Nike has also been successful managing its brands on the M&A front. They sold Haan brand to Apex Partners for $570 million, and the sale should close in early 2013. It also sold Umbro, a sportswear and football equipment supplier, for $225 million to Brand Group, where the sale should close before year end of 2012. Nike also recently increased its dividends by 17%, again surpassing all expectations and continuing the tradition of double-digit increases. 

While Nike has continued to appreciate, there has been a fall in their orders, such as Chinese orders which declined by 6%. Much of this has to do with changing consumer styles and a decelerating economy. But Nike nevertheless remains a strong and resilient brand. At 21.6x past earnings, it may be expensive, but EPS has historically gone up by 10.1% and this provides enough safety to hedge against macro downside.

TakeoverAnalyst has no positions in the stocks mentioned above. The Motley Fool owns shares of Nike. Motley Fool newsletter services recommend Nike. 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. This article was produced by the staff of TakeoverAnalyst, which does not intend on opening any position in the next 48 hours.

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