Two Consumer Goods Stocks That Slipped

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If you are looking to invest in niche apparel producers, Aeropostale (NYSE: ARO) and Nike (NYSE: NKE) are two popular stocks with almost cult followings. This kind of demand would be attractive for defensive investors uncertain about fickleness of consumers. However, Aeropostale and Nike have their own problems. Below, I review some of these problems and whether they detract from the overall positive investment thesis.

First-quarter struggles

Aeropostale largely struggled in the second fiscal quarter. Around a third of its value has since been shaved off. Thus, while it may be one of the best companies to work for, it hasn't exactly been one of the best to invest in of late. It has been criticized for weak execution in the holiday season, and Retail Greeks recently rated Aeropostale's CEO as the worst CEO in specialty apparel. Holiday sales declined by 6% as top-line same-store sales fell by 8%.

On the positive side, margins are looking like they will trend upwards from strong pricing stability and growing consumer demand following the fiscal cliff resolution. And the company is underrecognized for its incredible 11.5% free-cash-flow yield. Analysts forecast a 9.8% growth rate over the next five years. Assuming expectations are met, 2017 EPS will come out to $1.08. At a multiple of 15.5 times earnings, this translates to a future stock value of $16.74.

Discounting backwards by 10% yields a present value of $10.39. This is at a discount to the current value, but I believe the premium is warranted to the debt-clean balance sheet, strong generation of free cash flow, and positive macro trends.

Facing strong competition

Nike’s revenues recently went up to $25 billion, but the PE multiple could start to compress from softening growth. It ended 2012 with a disappointingly low 7.4% growth, which was far below expectations. The main reason for this low growth was the competition in general and Under Armour (NYSE: UA) in particular.

As a result, Nike has been working on revising brands by selling some, like Cole Haan for $570 million and Umbro for $225 million, and investing in others. The Lance Armstrong fiasco has put some downward momentum on the stock, which, in my view, was unfounded. In my view, the company's growth opportunities come from more sports sponsorship deals – Michael Jordan products and Lance Armstrong products, for example, have been notable catalysts for further investments.

Going forward, Nike has plenty of new opportunities and challenges. Oregon politicians have provided the firm with an effective promise that its tax treatment will not be changed, but China is starting to slow down. Brands are under pressure from Under Armour, but product innovation, like Flyknit, are winning back customers.

Compared to Under Armour, Nike looks undervalued despite its recent bull run. The latter trades at a respective 25.3 times past and 18.2 times forward earnings versus corresponding figures of 52.4 times and 32.7 times for the former. While Under Armour is forecasted for a 1,050-basis-point growth rate increase, I would lean more towards cheap investments to capitalize off an improving consumer sentiment.


Nike and Aeropostale have both slipped in recent quarters. However, they still maintain leading brands that are poised for further commercialization with consumer confidence improving. Both companies may not be the best investments right now, but they hold value as buy-and-hold stocks given the timelessness of their brands.

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David Gould has no position in any stocks mentioned. The Motley Fool recommends Nike and Under Armour. The Motley Fool owns shares of Nike and Under Armour. 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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