GuruFocus Premium Membership

Serving Intelligent Investors since 2004. Only 96 cents a day.

Free Trial

Free 7-day Trial
All Articles and Columns »

Investing in These Retailers Is Like Playing with Fire

April 23, 2014 | About:
jaggom

jaggom

0 followers

American Eagle (AEO) has been sailing through troubled waters for quite some time. But it is not the only one in the industry. Other teen retailers such as Aeropostale (ARO) and Abercrombie & Fitch (ANF) are also facing tough times. There are various factors accounting for these problems. Some of them are common to all three while others are specific to each company. Three common factors that have affected all three retailers include macro-economic headwinds, loss of target customers, and stiff competition from cheaper outlets like H&M, Zara, Forever 21 and others.

American Eagle’s Troubles

American Eagle’s recent quarterly results were rather lukewarm. Consolidated sales declined year-over-year as consolidated comparable-store sales, including AEO Direct, declined 5% as compared to last year’s 10% increase. However, this decline would have been worse if AEO Direct had not reported a comps growth year over year. Looking ahead, the company expects a mid single-digit decline in comps.

Promotional activities such as discounts because of stiff competition had a deep impact on merchandize margins. This contraction in margins, along with lower sales, resulted in an earnings decline. Management is taking various steps to turn around its situation.

Although third quarter numbers may not be in line with the company's expectations, American Eagle continues its international expansion plans. It plans to open multiple stores in Central and South America and Thailand; consequently, the retailer has signed three new licensing agreements in these regions. Looking forward, this could be a decisive step for American Eagle, and can act as an important growth driver for the firm.

American Eagle had also opened 13 new stores during the quarter and its coverage on square footage basis increased 2% year on year. As of now, American Eagle operates 1,064 stores across the United States and 61 international franchise stores.

Weak numbers from the third quarter resulted stock prices to decline for all three retailers. But still American Eagle can be stated as best in the lot, with positive profit margins. This has placed it in a better position than its peers Aeropostale and Abercrombie & Fitch.

Weakness at others

Aeropostale reported wider loss in the third quarter, with sales dipping 15.1% to $514.6 million. This was mainly led by weakness in certain core categories like graphics and fleece. Consequently, its consolidated comps declined 15%. Its e-commerce comps were also flat year over year.

Also, macroeconomic factors, weak store traffic, stiff competition, and muted spending by teenagers have further pressurized the margins, such that Aeropostale has reported an adjusted loss of $0.29 per share. Even the Thanksgiving holiday weekend could not bring delight to the retailer as comps decreased mid-single digits. Moreover, Aeropostale anticipates the margins to decrease further and expects the loss to be in the range of $0.24 to $0.32 per share in the fourth quarter.

According to the review conducted by Aeropostale, teens today want more options, more personal interaction with brands, and more flexibility in how they access these brands. Consequently, the company has responded to these reviews and made considerable changes in its operations. Yet, it would be too early to expect a turnaround for the retailer as it will take some time for the customers to know about these changes and respond to them.

Talking about Abercrombie & Fitch, it is facing an additional problem of public relations, apart from what the other two are facing. This was caused by a controversial video by the CEO, which had irked its target customers.

However, Abercrombie has revoked its policies of not selling XL and XXL sizes in women’s clothing. In fact, it will further increase its offering of sizes, colors, and fits for all of its clothing by spring 2014. This might help the retailer put a stop to its declining sales and boost the numbers.

Conclusion

Investment in any of these three retailers is like playing with fire. There are other cheaper options available in the market, which has further hurt their prospects and there seems to be no immediate relief for the retailers. Considering all the above factors, it will be prudent for investors to stay away from these stocks.


Rating: 3.0/5 (1 vote)

Voters:

Comments

Please leave your comment:


Get WordPress Plugins for easy affiliate links on Stock Tickers and Guru Names | Earn affiliate commissions by embedding GuruFocus Charts
GuruFocus Affiliate Program: Earn up to $400 per referral. ( Learn More)
Free 7-day Trial
FEEDBACK
Email Hide