2013 was a horrible year for many fashion retailers, despite the great year for stocks as a whole. For teen-focused brands like the Gap (GPS), American Apparel (APP), Aeropostale (ARO), Ambercrombie and Fitch (ANF) and American Eagle Outfitters (AEO), it was a year of falling sales and a contracting market.
In the last couple of days, some retail stocks have reported what may be the beginning of a recovery. TJX Companies reported revenue growth of 7.3%, slightly above expectations, with comp sales rising 5% for the HomeGoods brand and 2% for Marmaxx. Dick’s Sporting Goods (DKS) also beat expectations with 10.5% rev growth, above expectations, with 41 new stores and same-store sales up 4.1% despite weak demand for the Golf Galaxy brand. Comp-store sales rose 3.2%, way above the 2.2% expectations analysts had been expecting.
The old teen fashion names are not doing well, however. ARO reported 13% decline in revenue, but the stock has mostly priced that in, so it’s recovering as the forward expectations turn optimistic. American Apparel saw flat revenues and an EPS loss of 9 cents, but those results were far above expectations and the stock, which rallied before the release, has not erased its gains in pre-market trading.
Looking at teen names and the more broad-based sports and discount department store names DKS and TJX, any investor could get confused about what this means for the broader economy. Is consumer confidence, which has seemed to rebound according to many studies, actually translating into more purchasing? If so, where are the teen sales?
Some retail experts have pointed to strong growth in e-commerce and private labels in the fast fashion sector, like Zara Espana and H&M Company. Many fast-growing online-only brands have attracted dollars from Millennials who have no problem buying clothes virtually, and who see little attraction in the mall experience of the twentieth century. Therefore, the teen-focused names would be an unwise place to look for broader macroeconomic trends.
If that is true, strong results at DKS and TJX are much more indicative of a strengthening economy, and confirm what we have see from consumer confidence surveys and jobless rates in the past few months.
But what about allocating capital to the retail sector, if teen retailers are still struggling? On the one hand, these have become dangerous shorts. In the past year, ANF is down 14%, AEO is down 31%, and ARO is down over 70%; with a market cap of $287 million, ARO has little room to fall. The larger ANF and AEO have also made aggressive moves abroad and e-commerce initiatives that may help the names turn around.
Are they good long bets? That’s tough to say too, since many of these names haven’t shown sales growth in a long time. AEO hasn’t shown revenue growth since 2012, and none of these names have made a convincing move to attract Millennial spending at a time when smaller start-ups have taken their market share with ease. Since top-line growth is the best kind of growth, without that it is hard to make a bet on a turnaround.
This is one reason why APP is an attractive name for some investors. Its revenue growth is not as deeply negative as some other teen fashion brands, and the company has recently replaced its dodgy, incompetent management with pros who know the Millennial demographic well. APP has recently hired Googler Laura Lee, who worked for years developing the Millennial-loved YouTube platform. If she can bring that same kind of excitement to APP, it may be a good bet at current prices.
But that’s a very big if, and many investors have lot a lot of money betting on executive shakeups. The bigger question is: how are Millennials buying clothes, and is APP aligned with that trend? if not, can it be? The answers to those questions can earn investors a lot of money, either way.