Is It Time to Be Afraid of Teen Retailers?

The end of August was a terrible, horrible, no good, very bad week for teen retail. Of several names that reported, three disappointed:  Aeropostale, Abercrombie & Fitch (NYSE: ANF  ) , and American Eagle Outfitters. Two retailers that didn't disappoint were Urban Outfitters and Gap, but neither is truly a teen retailer. Gap sells to men, women, and children and Urban's main demographic is the 18-to-34 year old category.

No uniforms here

The Buckle (NYSE: BKE  ) reported second-quarter EPS inline with previous guidance and beat on revenue. Comparable-same-store sales were up 3.2%. Online sales, excluded form comparable-store sales numbers, rose 5.7%. The gross margin for the quarter improved 50 basis points to 40.6%. The stock didn't move much because the company had pre-announced on Aug. 8. Otherwise it would have risen more comparing its solid earnings to the aforementioned losers.

This company is bucking the trend in teen retail because it doesn't adhere to a "uniform" image as has been cited on Monday-morning quarterbacking on Abercrombie and its ilk. Also, Buckle's demographic trends to slightly older teens and young adults.

Since November 2012 it has been refurbishing older stores for a total of 339 of 452 stores. Nine of that total are newly opened stores with four more planned by year end.

As much as I like this name for its yield of 1.6%, frequent special dividends, no debt, and reasonable forward P/E of 14.3, it has a considerable short interest of 25.6%. That regular dividend tacked on to last December's special dividend added up to an 11.1% annual yield. Buckle's price to sales at 2.2 is triple that of Abercrombie & Fitch, which now has a yield of 1.7% and a forward P/E of approximately 9.9 after selling off some 20% after its earnings.

Buckle is entirely domestic while Abercrombie & Fitch has a larger international presence. In fact, international was about the only bright light in its quarter with sales up 15%. Yet analysts give Abercrombie a 15.2% five-year EPS growth rate, giving it a low PEG of 0.8. That growth rate seems optimistic and highly dependent on its International operations.

Meanwhile, Buckle is deemed the slow grower with a 6.3% five-year EPS growth rate and a PEG of about 2.4. That actually seems right on the money. The Buckle also has a high insider hold of 41% and a strong promote-from-within policy motivating employees.

Buckle's stock has barely moved since November when it traded at $50 and closed at $52.49 on August 23. After Abercrombie's comments that it couldn't refresh inventory fast enough, I naturally thought of Buckle where new product comes in daily. Also, only one-third of Buckle's sales are its private-label brand, with the remaining comprised of 20-top brandslike Affliction, Savage, and Hurley. It also offers value-added services in store like fit consultations, alterations, and personal-shopping service.

Who's next to fall

Teen retail is fickle as Aeropostale and American Eagle have certainly learned, but what happened to Tilly's (NYSE: TLYS  ) , once such a lauded IPO? It's trading close to its 52-week low of $12.00, having fallen from $17 and change in mid-July -- down five bucks in a month and down from a high of $19. Tilly's is a B-school model of how far and fast a fashion stock can fall.

Despite reasonable debt to cash of $3.8 million to $48.56 million and a price-to- sales ratio of approximately 0.8, better than Buckle, its chart looks like a thrill ride (see below). Tilly's, like The Buckle, also has a high percent of sales going towards private-label merchandise, but its California-style focus suffers from much of the same "uniform" problems as did Abercrombie, Aeropostale, and American Eagle. Style peers Pacific Sunwear and Billabong have also struggled with this. It should be noted that Hollister, Abercrombie's surfer-lifestyle store, had the worst performance of its branded stores with sales down 13% in the quarter.

Then there is quarter after quarter of contracting operating and net margins as detailed by Fellow Fool Seth Jayson, flat gross margin over five years, and same- store sales growth of 2% and under when as a fairly new IPO (it debuted May 2012) it should be doing much brisker business.

Tilly's is trading below its debut price of $16.81. The company certainly has room to grow with only 175 stores in the US, but where its teen customers (who are having trouble finding part-time jobs) will come from I don't know.

ANF Total Return Price Chart

ANF Total Return Price data by YCharts

The Foolish takeaway

Although I have pounded the table on Buckle since last November, adding the 10% or so total yield (including the special dividend) to its 5% price appreciation since then one would have done just about the same as an S&P 500 index fund. It is still one of the most reliably performing specialty retailers out there but its relatively high price to sales and slow-but-consistent growth aren't all that thrilling.

If you want thrilling, you can go for a ride on the Abercrombie & Fitch Express but it could be a gut-wrenching retail derail. Some might choose to take a chance on this now-humbled chain but I'd be very afraid for you. As for Tilly's, contracting margins and an unfortunate fashion niche should scare you silly.

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