One Apparel Stock That Could Deliver a Windfall

Perry Ellis (NASDAQ: PERY  ) is a value stock that has under-performed over the last few years. The company is known for its unique apparel, and has huge potential for revenue growth. In addition, the company's small size provides it greater room for growth. Perry Ellis' earnings are significantly below pre-recession levels, and a mere return to those levels could make the stock jump upwards of 50%. Value investors should seriously consider adding Perry Ellis to their portfolio.

Business model

Perry Ellis is popular for its unique and sophisticated designs. The apparel features a casual look that incorporates tasteful patterns and different textures. Such designs can be found in few others brands. Consequently, the company has built a huge customer following and has become a favorite among those who prefer suave business casual apparel.

A major competitor of Perry Ellis is Calvin Klein, which is owned by Phillips-Van Heusen  (NYSE: PVH  ) . Calvin Klein's offerings are equally fashionable, but have distinct designs and use more color. Perry Ellis and Calvin Klein do have an overlap of some customers, and are in strong competition with each other.

Both Perry Ellis and Calvin Klein sell men's and women's apparel. However, Perry Ellis is mostly focused toward the men's side of the business and has few options for women. Both companies sell very fashionable apparel in the same price range. For instance, each company sells men's shirts in the $65 to $80 range, and therefore competes for the same lot of customers.

Polo Ralph Lauren (NYSE: RL  ) , another strong competitor, offers apparel that is 20% to 30% more expensive than that offered by the other two brands. It is considered more premium and is almost always fashion-forward and relevant.

Perry Ellis is the least-popular brand among the three and has a lot of potential to grow. The company has slightly less than $1 billion in sales, and holds the potential to grab market share from other, more popular brands.

Revenue

Perry Ellis' revenue has grown consistently over the last decade. However, the earnings growth has been inconsistent. The company's earnings in 2012 were almost the same as those in 2003. Clearly, the company has struggled to keep its direct and indirect costs down. Perry Ellis has the lowest gross margins of the three designers, and a potential increase in margins could bring the stock into balance and result in huge gains .

On the other hand, Ralph Lauren enjoys higher gross margins due to the company's pricier apparel. Unlike Perry Ellis, Ralph Lauren has seen very high earnings growth over the last decade. Ralph Lauren's EPS has risen almost 400% over that period. Similarly, Phillips-Van Heusen has seen high earnings growth recently--so much so that the company's earnings are 30 times 2003 levels. 

Stock

Perry Ellis is the cheapest of the three stocks. It offers the lowest P/E ratio (trailing-12 months) among the three companies, at 17.9. In addition, 2012 EPS was 40% lower than that 2011 and 2010 results. It was also close to 50% below that in 2007. A potential return of EPS to prior levels could produce significant capital gains for investors. The much lower current EPS makes the stock a value purchase.

Conversely, Phillips-Van Heusen's P/E ratio (trailing-12 months) is quite high, at approximately 28.6. The company has had record earnings recently, and may continue to do well.

Also, Ralph Lauren's stock is up 400% since the end of the recession. The company's P/E ratio (trailing-12 months) is at 21.5. Ralph Lauren has consistently increased its earnings over the last decade; during that period, it has not had a single annual decline in earnings.

Just like Phillips-Van Heusen, Ralph Lauren appears to be expensive, especially in relation with its peers. Most other retail brands in the market have much lower trailing P/E ratios. For instance, Abercrombie & Fitch (-17.22), American Eagle Outfitters (-12.95), and Gap  (-16.6). Since Phillips-Van Heusen and Ralph Lauren have much higher valuations and have produced record earnings, they may not be suitable as value investments.

Conclusion

Perry Ellis' relatively low P/E ratio makes the company a good bet for value investors. The company has strong business fundamentals, and is loved for its urbane apparel. The same could be said about Calvin Klein (Phillips-Van Heusen) and Ralph Lauren, but both have already tasted immense success and cannot be considered value stocks. Perry Ellis, on the other hand, has higher possibilities for a windfall gain.

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