Where to Put Your Money in Apparel Retail

It's an all retail stock showcase, on Tuesday's "Investor Beat."

Mar 11, 2014 at 7:22PM

Teen apparel retailers American Eagle Outfitters and Urban Outfitters are both making the news today after being beaten up on the market, with both stocks near 52-week lows. While Urban Outfitters did see some pretty good Q4 results from its Anthropologie business at least, American Eagle's earnings report was awful, with profits down a staggering 89% from the same quarter last year.

On Tuesday's Investor Beat, host Chris Hill and Motley Fool analysts Morgan Housel and Mike Olsen look at the extremely difficult business of teen apparel. Not only is the customer base notoriously fickle, but Mike also notes that they are a very underemployed demographic at the moment, even while the broader economy recovers. Those two factors together make this an exceptionally difficult consumer base to appeal to, though Mike also looks at one advantage Urban Outfitters may have over the competition.

Then, in a deal worth $1.8 billion, Men's Wearhouse is finally buying Jos. A. Bank. The market loved the deal, with both stocks up on the news, but Mike points squarely at Jos. A. Bank shareholders as the real winners of the deal, as Men's Wearhouse will be paying an outstanding 10 times EV/EBITDA for the company. The guys discuss why the elimination of an element of irrational competition is one factor making the deal worth the price, as well as why men's apparel may be an easier market than other apparel markets, and what the experience of shopping at the new combined company may look like from here.

Also, shares of J.C. Penney moved upward today, after analysts upgraded the stock to a buy on expectations that same-store sales will continue to grow in 2014. However, with such low hurdles to clear for J.C. Penney to grow its same-store sales, is this prediction really indicative of a company turning around, or is the optimism here short sighted? Morgan makes the point that this could be what Warren Buffett once called a "cigar butt stock." They also consider whether the company would need to get a lot smaller before a turnaround was even possible, and what plan, if any, management could have for bringing customers back in the door.

And finally, Mike and Morgan each discuss stocks they're watching closely this week. Morgan says that for a real circus, keep an eye on Plug Power. The insane volatility around this stock is a symbol of the amount of speculation there is in the power market at the moment. For a stock to buy, however, Morgan tells investors why he still loves Paychex. Meanwhile, Mike looks at Chiquita Brands International, and its billion-dollar deal to buy Fyffes, creating the world's largest banana supplier. Mike discusses what impact this will have on the banana market, and why it may not be struck down by regulators, despite starting to seem like a monopoly.

Wanna know the best places for your investing dollars in retail today?
To learn about two retailers with especially good prospects, take a look at The Motley Fool's special free report: "The Death of Wal-Mart: The Real Cash Kings Changing the Face of Retail." In it, you'll see how these two cash kings are able to consistently outperform and how they're planning to ride the waves of retail's changing tide. You can access it by clicking here.

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Chris Hill, Michael Olsen, CFA, and Morgan Housel have no position in any stocks mentioned. The Motley Fool recommends McDonald's, Paychex, and Urban Outfitters and owns shares of McDonald's and Paychex. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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