Abercrombie & Fitch (ANF) Opened in 1892, New Albany, OH-based Abercrombie & Fitch is a major retailer of clothing for men, women and children. Operating primarily under it’s A&F and Hollister brands, the $4 billion company has nearly 1,100 stores in the United States and abroad. Abercrombie stock is currently trading for around $48 per share (52-week range is $40.25 - $78.25), with a one-year target of $58.50. The company pays a dividend of $0.70 for a yield of 1.4%.
Abercrombie stock tumbled nearly 13% in the past year, and with its reasonable price to book ratio of 2.17 and forward price to earnings of 10.5, it looks to be an undervalued stock. Although the company did well with a quarterly revenue increase of 15%, investors reacted to its punishing 79% earnings drop. Unlike the run that most of Wall Street has enjoyed in 2012, A&F continues to lag, with its stock price running about 20% below its 200-day moving average. Nevertheless, this is a very solid brand and its attention to fashion trends like stove pipe jeans will likely bring the company around. With a 15% target gain forecast and a nice dividend, now could be an excellent time to slip into some Abercrombie & Fitch stock.
Gap (GPS), another of the clothing companies that struggled to regain its momentum, seems to have its shoes on the right feet now. Operating 3,100 stores and 200 franchise in 90 countries worldwide, the $11 billion company has seen its share surge in February, soaring around 22% in share price since the end of January. Trading around $23 per share, the stock is close to the top of its 52-week range of $15.08 - $23.73. Its one-year target is flat, but the company pays a $0.45 dividend, giving it a 2% yield.
Gap struggled in 2011, with its share price and quarterly revenue down 2% and its earnings falling 36%. The company has more debt (at $1.66 billion) than cash ($1.4 billion), and its percentage of float held in short positions is up to 5.2%. The company still has a reasonable 28% return on equity. While the company has tried creative things to generate revenue (like opening and then closing a Facebook store), its sluggishness is keeping it from being a good investment right now. I recommend watching, but not buying, Gap Inc at this time.
Liz Claiborne (LIZ) focuses on the mid-to-high-end fashion segment for men, women and children, with over 400 stores in the United States and 300 throughout Canada and Europe. The New York City-based company has a capitalization of just under $1 billion as it struggles to regain its momentum after tumbling to a 52-week low in September (its range is $4.02 - $10.46). The company does not pay a dividend.
The stock is currently trading just under $10 per share, and although its one-year target is flat, some speculators are trading on its upside. At the same time, a number of investors are betting against the company, as evidenced by the stunning 31% of its float that is held in short positions. Quarterly revenue at Liz Claiborne dropped 10% year-to-year, even though its share price climbed 103% over the previous 12 months. The company seems to be overextended, with total cash of $11 million and debts of $747 million. With so many strong options in the sector, Liz Claiborne Inc is one to avoid at the present.
Ralph Lauren (RL) is one of the true heavyweights in the fashion industry. Whether it is on the runway, a rack in a department store or on Wall Street, this $15.6 billion company makes a statement. That brand recognition can be quite appealing to investors, and it has translated to success for the company. Currently trading around $171.50, the stock has maintained a dizzying climb that has seen its share price rise over 38% in the past year. (Its 52-week range is $105.11 - $178.47) The stock appears to still have room to grow, as seen by its one-year target of $186.
The company also pays a dividend of $0.80; however, at a 0.5% yield and a 12% payout ratio, it could probably increase that number. 2011 was solid for the fashion icon, as its quarterly revenue climbed 16.6 percent, while its revenue inched up 0.4%. The company is nearly debt-free, with only $266 million owed and a debt to equity ratio of 7.5. Although 6% of its float is held in short positions, that’s about the only negative you can find. I recommend Ralph Lauren as a buy.
Philadelphia, PA-based Urban Outfitters (URBN), is a chain of stores specializing in clothing and domestic products. Featuring the Urban Outfitters, Anthropologie, Free People, Terrain, Leifsdottir, and BHLDN brands, the $4.25 billion company operates nearly 400 stores in the United States, Canada and Europe. The company stock is trading near $29 per share, has a flat one-year target and a 52-week range of $21.47 to $39.26. Urban Outfitters does not pay a dividend.
After seeing its share price drop 21% in 2011, it is having a hard time rebounding. The company did not fare very well, with its quarterly growth rising 6%, but its earnings dropping off almost 31%. The stock seems to have met serious resistance at $30, with three separate moves in the past four months being able to break through that important level. With 85% of its shares held by institutional traders, it’s apparent that they see the difficulty, as nearly 11% of the company’s float is held in short positions. Although the company is debt-free, it only has $90 million in free cash flow, something that could be important as it tries to energize its sagging position. Overpriced (price to earnings ratio near 20) and over sold (price to book of almost 4), I would suggest watching Urban Outfitters until it can get past that $30 resistance point before considering a position in the company.
The fashion industry is likely to continue climbing in 2012, especially if a slowing dropping unemployment rate leads to more disposable income. For people wanting to invest in this sector, Abercrombie & Fitch Company and Ralph Lauren Corporation would make great holdings, while it would be better to avoid Gap Inc, Liz Claiborne Inc and Urban Outfitters Inc.
About the author:I'm mostly interested in income investing using dividends, preferred stocks and other debt instruments, and pair trading.
I fundamentally analyze every business from the top down.
In my personal life, I have a strong Jewish faith and enjoy playing Scrabble and entrepreneurship.