Are These Clothing Stores a Good Fit Now?

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With the Easter shopping surge behind us, apparel retailing has fallen quiet for a while, the lull before the summer sales. And retailers are feeling positive; the National Retail Federation expects we'll spend 8.4% more on Mother's Day gifts this year, so that's an early indication that this could be a good summer.

And one area where things are definitely getting better is apparel. Cotton prices have fallen by more than half since peaking this time last year and as the economy recovers, shoppers are spending more. The latest Commerce Department retail figures showed clothing-store sales in 2012 so far running 10.5% over the same period in 2011.

As we said before about The Gap, specialty apparel chains are beginning to see results from their efforts to freshen up merchandise and appeal to younger shoppers, with the macro trends giving them a headwind. Putting aside the discounters like TJX Cos. (parent of T.J.Maxx and Marshalls) and the "fast-fashion" retailers like Forever 21, there is a whole lot of mushy middle in apparel that had not been getting much attention until recently. Its target consumer is midprice shoppers, a group that cut back early in the recession and is still not quite back to their old spending habits. And that makes for an opportunity to play the macro trends.

Ann Taylor (NYSE: ANN  ) , like The Gap, was suffering from a case of the uglies. Shoppers just weren't liking the clothes. Since hiring a new head designer from Club Monaco in 2010, it's been turning this ship around and same-store sales are up 5.3% for the year, and there is hefty double-digit growth online, which shows the company is finally joining the 21st century and grasping e-commerce.

Fool John del Vecchio rightly points out that the boomer consumer segment Ann Taylor aimed for is not growing, but there are signs that the brand is aiming younger now. At the end of last year, it had nearly twice as many of the younger-skewing Loft stores as Ann Taylor locations, and its plans call for opening more while redesigning existing Ann Taylor locations.

The chain had also suffered because its clothes appeal to working women, who weren't going to spend their salaries on their wardrobe during the recession, if they still had jobs. Profits had suffered recently due to all the promotional activity needed to goose sales. Those issues should fade into the background with an improving economy and Ann's sales should keep going up, as long as it continues to deliver clothes women want to buy.

Ann's stock has had a good run lately, but there's disagreement among analysts about target prices. SunTrust Robinson is on the high side, with a target price of $33 per share, but the consensus is around $30, according to Zacks. With a P/E around 18, it does not look overpriced, if you believe it can keep the momentum going.

Ascena Retail Group (Nasdaq: ASNA  ) , parent of Dress Barn, Maurice, and the tween clothing chain Justice, is spreading its bets across age groups. The company is also paying a lot more attention to marketing Maurice, which targets young adults with what the company calls "a 20-something attitude."

Like Ann Taylor, Ascena has had a good run this spring, but it's still off its 52-week high, and with a P/E of 17 doesn't look overpriced. And the consensus target price of $24 is still a few dollars off its current share price.

Analysts are bullish on the stock for the most part. Zacks noted it's beaten earnings estimates five out of the last six quarters, without getting a huge bump on its share price, so it's tagged it as an aggressive growth opportunity.

Chico's FAS (NYSE: CHS  ) is trading at a slightly higher P/E, around 18, but also below the consensus target of $16.50 a share, so there's some upside left to the stock. It had a good run after it reported fiscal-year results that included better-than expected sales and fourth-quarter earnings growth of 21%.

Other Fools have pointed out that Chico's has cash flow and earnings-quality issues and that profit margins are under pressure. But if you look at top-line sales, it does look like the company is on an upward curve, and it recently declared a cash dividend payable in June that's 5% above last year's. As Morningstar analysts have noted, it has done a good job getting customers back in as the economy recovers, and it has more growth potential ahead in the younger-skewing White House/Black Market chain.

None of these stocks looks undervalued now, but they serve an underappreciated market that's still in the process of recovering. That's where their top-line potential lies. As we said about Gap before, it comes down to stores having products shoppers want to buy and shoppers having money to buy them.

If these apparel stocks are not your style, check out another retailer, The Motley Fool's top pick for 2012, in this report. It's free, just click here.

Mercedes Cardona does not own shares in any of the companies mentioned in this article. Follow her onTwitter and on her website

We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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