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Investing in These Clothing Retailers Might Not Be a Good Idea

June 25, 2014 | About:
vinaysingh

Vinay Singh

5 followers

While it has long been said that "clothes make the man," today's retail apparel industry players that do not have solid long-term sales strategies may see themselves struggling in some ways to stay alive - especially with regards to their physical retail locations. This may still have to do with the overall economy, but competition in the apparel industry is quite intense.

Essentially, the apparel industry includes numerous companies, including those that design and sell clothes, footwear, and other wearable accessories. Due to the highly seasonal nature of some companies, it may be better to analyze the numbers on a yearly basis rather than on a quarterly basis. This is because quarterly sales from certain companies may be substantially more or less than other quarters.

Filling in the gaps in shareholder profitability

One long-loved clothier is Gap (GPS). This apparel-maker's brands also include Old Navy and Banana Republic. While Gap may not be the fastest-growing retailer of late, the company does have some pretty unique propositions when it comes to competing with large online entities such as Amazon.com by linking all of its stores and websites into one single inventory pipeline.

With this new inventory-management plan set to begin in June, customers will be able to reserve clothing online and then subsequently pick up their orders at the most convenient retail location.

Gap is also beginning to increase the construction of regional distribution centers. This will essentially aid in sending the appropriate merchandise to the stores that currently need it the most. This may be one of the catalysts that has moved Gap shares to a 10-year high. And, given its forward-looking momentum and a cheap EV/EBITDA valuation of less than 7 times, this growth may continue over both the short run and the long run.

Are options Limited with some Brands?

Another of the long-standing retail stores that helped itself through the tough economy of late is Limited Brands (LTD), although the company's revenue growth has been trailing the industry average recently.

This specialty-apparel retailer has a strong focus on its women's segment, including intimate and other types of apparel, personal care and beauty products, and accessories. Products are sold under various brands, including Bath and Body Works, Victoria's Secret, White Barn Candle Company, and C.O. Bigelow. Products are sold via physical retail locations, as well as through the company's catalogs and online.

Although Limited was a bit behind the overall apparel industry's financial averages during the quarter, it did increase its earnings by more than 10% - not bad in a still-recovering economy where purchases that are not necessarily necessities tend to take a back seat to other more pressing needs. The company also increased its net operating cash flow by almost 9%.

While the Limited Brands' entity offers investors a dividend of $1.20 per share - which equates to an annual dividend yield of just under 2.40% - a number of analysts rate the stock a Hold. Although its share price is presently hovering near its 52-week high mark, analysts expect a compound sales growth rate for the next five years in the high single-digits, making this stock worth buying now.

Is The Buckle tightening for shareholders’ profits?

The Buckle (BKE) also operates a retail offering of casual apparel along with footwear and clothing accessories. This retailer saw its net sales increase by almost 7% in the quarter, led primarily by sales of its men's clothing category.

Buckle saw an increase in its women's wear lines and footwear sales in the high-single digits compared to last year's quarterly results. And, although not considered impressive by many analysts, these figures did beat sell-side projections.

Analysts expect this company's share price to drop throughout the next year by roughly 12%, and investors would be well advised to take a wait-and-see attitude with this particular stock - especially since its dividend yield of only 1.7% is also somewhat weak.

Nevertheless, Buckle continues to produce very healthy cash flow that can support not only its current dividend but can allow the company to initiate a stock buyback as well. Buckle generated more than $220 million in cash flow last year alone. Keeping this in mind, any significant weakness in the share price will definitely be a good entry point; Or, if you are a long-term investor, you can always sell a covered call on your stock holdings!

How to revive?

As the Gap's current strategy seems to indicate, all three of these retailers will likely need to beef up their online presence in unique ways - especially if they want to continue competing with large online retailers such as Amazon that offer convenience and low prices to boot.

Another option is to capitalize on each of their individual specialty niches in order to build even deeper brand loyalty, and likewise continued sales, with their current customers. This will mean continuing to differentiate their brands, as consumers without such brand loyalty are much more likely to obtain clothing and other apparel elsewhere - especially if such consumers are more price conscious than brand conscious.

The bottom line

Going forward, investors in the retail apparel sector would certainly be wise to determine both the marketing and the online sales plans of a particular company prior to diving into a substantial share purchase.

And, here again, when looking for investment in retailers that have substantial ups and downs due to their seasonal nature, it is best to check on both the short-term and long-term outlooks for such companies - as this could make a very big difference in the immediate performance of the stock price.


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Comments

Enjoylife
Enjoylife premium member - 2 months ago

Hi Vinay,

One quick point. BKE you said to avoid especially because of it's somewhat weak 1.7% dividend. They pay a special dividend every year aside from the quarterly. Over the last 7 years total annual dividends have averaged $2.97 per share. At the current $44 stock price that is over 6.6% per year.

That makes them one of the most generous dividend payers in retail.

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