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Angst Among Teen Retailers
Maybe America's malls are not quite as empty yet as the one in the Romero classic Dawn Of The Dead, but investors can definitely hear some moaning from retailers. Wednesday's earnings from American Eagle Outfitters (NYSE:AEO) will not stand out as being all that exceptional, as most youth-oriented retailers saw a poor second quarter and have little optimism about the back-to-school season.
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The Quarter That Was
American Eagle reported that total sales rose 1%, while comparable store sales fell 1%. Unfortunately, there was not much to mitigate this performance. The company spent the quarter shutting down the disappointing MARTIN + OSA stores (so much for its attempt to move out of the core teen market), and overall online sales were down 9%. Making matters worse, that poor sales performance would have been even worse without some aggressive markdowns, and those markdowns pushed gross profit down 6%.
For better or worse, American Eagle's performance holds up relatively well against its peers. Pacific Sunwear (Nasdaq:PSUN) saw comparable sales drop 10% and there are fears that the company may not survive its turnaround. Hot Topic (Nasdaq:HOTT) continues to struggle even after years of struggling to reignite growth, and Buckle (NYSE:BKE) saw comparable store sales drop 7% in its most recently reported quarter.
On the flip side, Zumiez (Nasdaq:ZUMZ) did post comparative growth of 9%, but that has to be seen at least somewhat in the context of a rebound quarter from a horrible year-ago performance. Elsewhere, more value-oriented Aeropostale (NYSE:ARO) did post some decent growth as same store sales increased by 4% and diluted earnings per share experienced a 21% rise.
The Road Ahead
Unfortunately, any light at the end of the tunnel these days looks more like an oncoming train. Virtually no one in the teen retailing space is forecasting a strong back-to-school season, so this critical time of the year may struggle to show even a few percentage points of growth. Making matters worse, if this current economic malaise continues or gets worse, that could sucker-punch the Christmas season and turn 2010 into a lost year for retailers.
The closest thing to good news would seem to be that these conditions are not exactly new. American Eagle and Abercrombie & Fitch (NYSE:ANF) have both treated investors to a lot of volatility over the years - pullbacks of 50-80% are not all that uncommon over the long history of retail stocks. It would seem, then, that so long as these companies can stay in the game they will enjoy a rebound at some point.
The Bottom Line
Aeropostale may not be a bad idea today, but it does not sound like the value-price orientation that is propping up the company's business is doing anything great for the stock. The trick for Aeropostale is whether they can carve out a new leg of growth, as they seem to have claimed a lot of real estate already in the value market. Elsewhere in the value space, H&M is doing quite well for itself, and the stock largely reflects that.
For American Eagle, it is clear that the expectations here are minimal. If the company matches last year's free cash flow level and never grows again, the stock is actually trading below that implied value (roughly $13 per share). That is a pretty grim outlook and one that seems relatively easy for the company to beat. Still, the trouble with turnarounds is that the "when" is often in doubt, so investors attracted to what looks like a bargain-bin valuation will need to have some patience to see this idea work. (To learn more, check out Analyzing Retail Stocks.)
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IN PICTURES: 5 "New" Rules For Safe Investing
The Quarter That Was
American Eagle reported that total sales rose 1%, while comparable store sales fell 1%. Unfortunately, there was not much to mitigate this performance. The company spent the quarter shutting down the disappointing MARTIN + OSA stores (so much for its attempt to move out of the core teen market), and overall online sales were down 9%. Making matters worse, that poor sales performance would have been even worse without some aggressive markdowns, and those markdowns pushed gross profit down 6%.
For better or worse, American Eagle's performance holds up relatively well against its peers. Pacific Sunwear (Nasdaq:PSUN) saw comparable sales drop 10% and there are fears that the company may not survive its turnaround. Hot Topic (Nasdaq:HOTT) continues to struggle even after years of struggling to reignite growth, and Buckle (NYSE:BKE) saw comparable store sales drop 7% in its most recently reported quarter.
On the flip side, Zumiez (Nasdaq:ZUMZ) did post comparative growth of 9%, but that has to be seen at least somewhat in the context of a rebound quarter from a horrible year-ago performance. Elsewhere, more value-oriented Aeropostale (NYSE:ARO) did post some decent growth as same store sales increased by 4% and diluted earnings per share experienced a 21% rise.
Unfortunately, any light at the end of the tunnel these days looks more like an oncoming train. Virtually no one in the teen retailing space is forecasting a strong back-to-school season, so this critical time of the year may struggle to show even a few percentage points of growth. Making matters worse, if this current economic malaise continues or gets worse, that could sucker-punch the Christmas season and turn 2010 into a lost year for retailers.
The closest thing to good news would seem to be that these conditions are not exactly new. American Eagle and Abercrombie & Fitch (NYSE:ANF) have both treated investors to a lot of volatility over the years - pullbacks of 50-80% are not all that uncommon over the long history of retail stocks. It would seem, then, that so long as these companies can stay in the game they will enjoy a rebound at some point.
The Bottom Line
Aeropostale may not be a bad idea today, but it does not sound like the value-price orientation that is propping up the company's business is doing anything great for the stock. The trick for Aeropostale is whether they can carve out a new leg of growth, as they seem to have claimed a lot of real estate already in the value market. Elsewhere in the value space, H&M is doing quite well for itself, and the stock largely reflects that.
For American Eagle, it is clear that the expectations here are minimal. If the company matches last year's free cash flow level and never grows again, the stock is actually trading below that implied value (roughly $13 per share). That is a pretty grim outlook and one that seems relatively easy for the company to beat. Still, the trouble with turnarounds is that the "when" is often in doubt, so investors attracted to what looks like a bargain-bin valuation will need to have some patience to see this idea work. (To learn more, check out Analyzing Retail Stocks.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
by
Stephen D. Simpson, CFA
Stephen D. Simpson, CFA, is a freelance financial writer, investor, and consultant. He has worked as an equity analyst for both sell-side and buy-side investment companies in both equities and fixed income. Stephen's consulting work has focused primarily upon the healthcare sector, while he has also written extensively for publication on topics pertaining to investments, security analysis, and healthcare. Simpson operates the Kratisto Investing blog, and can be reached there.
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