Will Teen-Retail Stock Gains Continue Through Earnings Announcements?

Teen retailers have traded higher ahead of their earnings releases, but will this trend continue as companies in this space report in the next two weeks?

May 20, 2014 at 5:30PM

After a horrendous 2013, several top teen-retail stocks have seen recent surges over the last month. Specifically, Abercrombie & Fitch (NYSE:ANF), American Eagle (NYSE:AEO), and The Buckle (NYSE:BKE) have all traded higher during the last month ahead of their upcoming earnings reports. The important question investors is whether this performance will last after their quarterly reports, and if any of them is a buy for long-term Foolish investors.

A recent recovery, of sorts
Essentially, it has been a tough year for teen retailers, as competitive pricing, a drop in overall sales, and style changes have weighed on what used to be the big-name companies in the space.

Stock

52-Week Performance  

1-Month  

ANF

(30.3%)

6.1%

AEO

(41.1%)

7.4%

BKE

(12%)

11.1%

Source: Google Finance

With this chart in mind, might we be seeing a bounce off the bottom or the beginning of an uptrend ahead of important quarterly results?

Can online save the stores?
Abercrombie & Fitch will report its earnings on May 29, and at that point we will get a better look at its performance post-holiday discounting. With that said, in its fourth quarter the company beat analysts' expectations handily and saw a stock gain in excess of 6%.

However, its overall revenue declined 11.6% in the fourth quarter and its gross profit declined 440 basis points to 59%, yet investors were pleased with its 24% rise in online sales. Still, when you combine the 16% drop in store sales with the rise in online sales, the company's revenue is still declining at a double-digit clip.

Granted, the large investments that the company has made to grow its online channels may bode well for it, and analysts expect its revenue to decline 3.6%. At 14 times next year's earnings, Abercrombie is likely fairly valued and prepared to trade along with its fundamentals. In this case, its fundamentals are expected to head lower.

Margins will receive close attention
Like Abercrombie, American Eagle has yet to report its earnings, but it will on May 21. Investors will monitor its upcoming first-quarter report, as it will be one of the first companies in this space to release its quarterly report.

In the fourth quarter, American Eagle's stock fell 7%, but its 7% drop in total revenue was less than that seen by Abercrombie and it also did better on comparable sales. However, a rough winter and poor traffic contributed to heavy promotions, which consequently led to a whopping 930 basis point decline in gross margin to 31.9%.

At 14 times next year's earnings, American Eagle is valued similarly to Abercrombie, although analysts expect its revenue to be flat this year. Therefore, investors should pay close attention to the company's margins for the first quarter, as many of its excuses for poor performance in the fourth quarter are no longer relevant. If it sustains its margins, American Eagle could soar and set the tone for its peers.

Surprising growth and margins
The Buckle, unlike its peers, is a popular teen retailer of assorted brands that are popular with youth. The company will report earnings on the day following the report from American Eagle, but because of its monthly sales reports we somewhat know what to expect.

In retrospect, The Buckle's fundamental losses haven't been as significant as those of its peers in recent quarters. During the fourth quarter, its comparable sales fell just 2.8%, while its operating margin of 22.78% remained surprisingly sustainable.

Furthermore, in February and March of this year, its total sales rose 0.2% and came in flat, respectively, and expectations call for them to rise 3.5% this year. Therefore, it's the best-performing company of the bunch, and at 13 times next year's earnings it's also the cheapest.

Final thoughts
In looking at this space, it's really a toss-up to determine how companies will fundamentally perform in the first quarter. The one exception looks to be The Buckle, a growing company with high margins and an attractive price, which could signal long-term value and a good buying opportunity right now. Nonetheless, investors look to be placing their bets ahead of earnings, but until the quarter itself supports the upward stock moves, all of the stock gains could easily be replaced with losses amid a poor quarter.

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Brian Nichols has no position in any stocks mentioned. The Motley Fool recommends The Buckle. The Motley Fool owns shares of The Buckle. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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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