Washboard Abs & Profits to Match: Is It Time to Invest In These Apparel Stocks?
T. M. is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
With public nudity banned in San Francisco, the long spell of terror we clothed masses have endured is over. Once again, we can wear clothing without fear, which means that clothing stocks are due to jump, right?
Several major apparel retailers have in fact seen their stocks rise over the past year. For some, that has meant coming out of a slump. For others, it may mean some investors have missed the boat on a quick profit. Before we jump to any conclusions, though, let's take a closer look at these 'casual apparel' retailers and see what they have to offer beneath the washboard abs and cloud of cheap cologne.
Grab your money and watch
Full disclosure: I hate Abercrombie & Fitch (NYSE: ANF). Well, the image they project. But we can't argue with their position: with a middling market cap of $3.8 billion, and hovering 12% below its 52-week high, this might be a good time to get in on this staple of middle America malls.
Abercrombie & Fitch has increased sales by 17% on average over the past four quarters, and though the cost of sales has outpaced that number at a concomitant 19.5% over the same period, gross operating profits have nevertheless seen a 16% average increase over the past year, an impressive number considering the size of the company.
Part of Abercrombie's success can be lain at the feet of a declining current ratio and a subsequently high rate of debt. Though a current ratio of 1.6 isn't the end, the fact that it has been in decline for well over a year is cause for concern. With a PEG of 0.73, the stock remains a 'maybe': if it stops putting up profits as it has been, we may find the PEG evening out at a solid 1 pretty quickly.
Doing about as well as its namesake
American Eagle Outfitters (NYSE: AEO) is a close second to Abercrombie & Fitch, with a market cap of $4.0 billion. Sales have declined 12% since the start of the year, though since then they have increased by an average of 13% per quarter, with cost of sales lagging behind at an admirable 9.2% per quarter in the same period. American Eagle Outfitters is, in other words, recovering steadily.
The company's current ratio is at a comparatively admirable 2.6; it has seen a decline since July of last year, but that's to be expected in light of the stock's drop last spring. What should give you pause is their forward PEG of 1.09. While they are managing a recovery, that only means they're scrabbling their way back towards parity with previous levels of profitability. The stock remains evenly, if not overly, valued, and a bargain hunter would probably do well to stay away from it for the moment.
For the long-term investor, however, a dividend yield of 2.2% is considerable. As ever, make your investment decisions based on your own needs.
An achievement gap
The undisputed king of blue jeans and suburban sweaters is, of course, The Gap (NYSE: GPS), with its market cap of $17.06 billion. Yet they, too, are flagging. Sales have increased by an average of nearly 11% per quarter over the past four quarters, yet cost of sales have increased by a concomitant 13%. Yes, at the level of profit The Gap brings in, this is still a huge increase in absolute dollars, but this reveals increasing inefficiencies in the company's sales strategy. Long-term investment begins to grow murky.
The Gap's current ratio of 1.7 is not unhealthy, per se, but with long-term debt jumping sharply over the past two years, what growth they have managed becomes suspect. Overvalued at a PEG of 1.29, The Gap's growth seems unsustainable.
Long term versus bargain investing
With PEGs looking about even growth-hunters might be loath to invest in these stocks, but the PEG ratio isn't the crystal ball some make it out to be. More concrete measures of financial health like current ratio and gross profit are certainly better measures of a long term, healthy investment. By this measure, AEO is the safest investment, though perhaps not the most exciting. If you're investing for the adrenaline rush, though, you may want to take up mountain biking.
Overall, mind the dividends each of the aforementioned stocks provide. While bargain-hunting may be a moot point with these apparel companies, a portfolio could do worse than hold to slowly-expanding companies with strong dividends rolling in. For the short term, keep an eye out.
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Tyler Loyd 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!