Can These Clothing Retailers Dress Up Your Portfolio?

Many different words have been used to describe the economic recovery in the United States -- sluggish, uneven, slow, weak, fitful, puny. One of the best descriptions recently comes from the CEO of the National Retail Federation, Matt Shay, who said regarding consumer spending that it's an "either/or" situation at the present time.

He means that the consumer is still being extremely careful about spending and may, for example, choose between purchasing new clothes or buying materials for a home improvement project.

Today we'll look at three clothing retailers that are dealing with this either/or economy with varying results. Each one serves a different niche -- men, women, and teens. 

Fulfilling Ann's LOFT-y ambitions
ANN
(NYSE: ANN  ) owns two of the leading women's specialty retail fashion brands, Ann Taylor and LOFT. The company operates more than 1,000 stores, and in the last year it has added 45 stores.

ANN recorded a healthy 7% increase in total net sales for the second quarter compared to the same quarter last year. Comparable store sales -- from stores that have been in operation at least 13 months -- were up nearly 3%, with both brands achieving increases.

The sales growth allowed the company to leverage its fixed costs. When combined with efficient cost management, the company was able to lower SG&A expenses as a percentage of sales to 45.3%, a nearly 2 percentage point improvement.

Earnings per diluted share soared 21% to $0.76 -- a record performance. Management expressed optimism in the second quarter earnings press release, predicting that the company could achieve record full year earnings-per-share as well.  

Teens are not easy to please -- who knew?
Aeropostale
(NYSE: ARO  ) is a specialty retailer of casual apparel and accessories whose principal target markets are 14 to 17 year-old young women and men. It operates 975 stores in the U.S. and Canada. The company also has a smaller brand -- 145 stores -- for smaller kids, P.S. from Aeropostale, that serves four to 12 year olds.

Second quarter results were, well, not too good. Total net sales declined 6% compared to the same quarter last year. Comparable store sales were even worse, down 15%.

Aeropostale posted an operating loss of $43.8 million compared to a tiny profit in 2012's second quarter. Cost of sales jumped from 75% to 82%, and SG&A expense increased as a percentage of sales from 25.2% to 27.5%.

Management attributed these disappointing results to the weak traffic trends at their stores and the high levels of promotional activity undertaken to retain customers. The company's CEO, Thomas P. Johnson, expects the challenging teen retail environment to continue. The company is addressing this situation by changing its merchandise mix to shift teens' perception of its brand and regain market share.

Suited for success?
The Men's Wearhouse
(NYSE: MW  ) is one of the largest specialty retailers of men's apparel, operating 1,137 stores that carry suits, sport coats, and accessories. The company's revenue streams include retail clothing sales, tuxedo rental revenue and sales of corporate apparel. Their brands are Men's Wearhouse, Moores and K&G.

This company also reported a sales decline in the second quarter -- 2.3% -- although their flagship brand, Men's Wearhouse, declined only 0.70% and comparable store sales were up 0.70%. The company reported that these results were below internal expectations and the result of a decline in customer traffic.

Management, in its updated 2013 guidance, expressed concern about the macro trends in the apparel industry, and lowered its assumptions for comparable store revenue growth by 2%.

It's good to keep in mind that despite the company's cautious forecast, it remains profitable. Operating income for the quarter was nearly $67 million, more than 10% of sales.

The bottom line
In Aeropostale's most recent quarter the company seems to be doing worse than the economic backdrop would dictate. We should applaud the company's strategic changes, but are left to wonder whether it will be offering the merchandise mix that its target market desires. Another question is whether or not the company can craft a convincing marketing message to bring more of this target market back to their stores. The teen market is fickle, and peer group word-of-mouth can help or hurt a retailer's sales.

Men's Wearhouse experienced just a modest drop in sales and it remains profitable. They also get kudos for the most creative excuse for unsatisfactory sales results: their tuxedo rental business -- much of which is driven by weddings -- was negatively affected by the year being 2013. Brides are apparently reluctant to have the number 13 associated with their wedding date. The triskaidekaphobia effect -- fear of the number 13 -- is expected to have a positive effect on the company's tuxedo rental revenues in 2014 because engaged couples postponed their weddings from this year to next. 

And now on to my favorite of the three companies. The quarterly sales results indicate that women are replenishing their recession-depleted wardrobes at a faster pace then men. Given the unsettled economic situation, I would go with quality of recent financial performance -- and the company's expectation of record earnings per share -- and say ANN is the best choice for investors.

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