The Latest Turnaround in Teen Retail Could Be Underway

The teen apparel market remains a tough market to navigate for investors, but this company is headed in the right direction.

Apr 18, 2014 at 2:51PM

The teen apparel industry has proven to be quite volatile over the past few years. Some of the most volatile stocks in the sector have belonged to the "Triple A's," which were staples of the apparel industry during the 2000's. These three companies are Abercrombie & Fitch (NYSE:ANF), Aeropostale (NYSE:ARO), and American Eagle (NYSE:AEO).

All hope is not lost
These logo-based retailers have quickly fallen out of fashion and taken a back seat to fast-fashion retailers. However, there is one teen apparel retailer that's looking to better compete with the fast-fashion retailers such as H&M and Forever 21.

Abercrombie & Fitch plans on turning its Hollister brand into a fast-fashion store. The initial step has been redesigning its storefront, which can already be seen at some stores. 

Abercrombie's other focus that should help its turnaround
The move into fast-fashion remodels should help give Abercrombie an edge over its teen apparel peers, but what drives its top line is store expansion. By positioning Hollister as a fast fashion brand, Abercrombie & Fitch will be able to better diffuse this brand into international markets. One market that Abercrombie & Fitch already has its eye on is the UAE. This is in part because the per capita spending on apparel in the UAE is one of the highest in the world.

The other beauty of focusing its expansion attention to Hollister is that stores are smaller than its other brands, making them cheaper to setup.

Meanwhile, it's close to closing all of its Gilly Hicks stores. It plans on continuing to close underperforming stores to enhance profitability going forward. Profitability is one area that Abercrombie & Fitch can improve. American Eagle has an operating margin of 7.2% over the trailing twelve months, while Abercrombie's is only 5.2%. 

Leaving other apparel retailers behind  
American Eagle is in second behind Abercrombie & Fitch when it comes to annual revenues. Despite trading in line with Abercrombie & Fitch from a valuation standpoint, Wall Street expects American Eagle to grow earnings at an annualized rate that's half of Abercrombie & Fitch's. Beyond that, American Eagle has seen its comparable store sales fall by 5%, 7%, and 5%, respectively, over the last three quarters.

As for Aeropostale, it has been the hardest hit of the "Triple A" retailers. Shares of Aeropostale are down over 60% during the last twelve months. Aeropostale is making the shift away from teen retail, looking to capture more of the pre-teen market with its P.S. stores. It has developed partnerships with Pretty Little Liars and Bethany Mota as well.

Nonetheless, shares continue to slide. Although it has no debt, it recently inked a deal with Sycamore Partners for $150 million. This should carry the company through the upcoming holiday season, giving it a chance to shift away from logo-based clothing and find a connection with its shoppers. 

Bottom line
Abercrombie & Fitch appears to be at the forefront of executing a turnaround. The other two, American Eagle and Aeropostale, look to be further behind. However, it is worth noting that Aeropostale is quite cheap; it trades with a P/S ratio of 0.15, compared to Abercrombie & Fitch and American Eagle, which both trade just above 0.5.

Nonetheless, Aeropostale appears to have a lot more execution risk as it tries to redefine its brand with partnerships. American Eagle has yet to lay out a clear strategy, while Abercrombie & Fitch is taking a more drastic approach and planning to take fast-fashion head on. For investors looking for a turnaround story to invest in, Abercrombie & Fitch is worth taking a look at.

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