Bargain Hunting In the Apparel Sector

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Despite the strong earnings we are witnessing from a wide swath of sectors, it doesn't appear that mall-based clothing retailers were invited to that party. Keeping in mind that mall-based apparel companies are highly cyclical and prone to wild swings, I feel now is the time to begin thinking about investing in some of the companies in this sector.

It's fairly common for the retail sector to begin rebounding long before the economy finds its footing, and likewise, retailers often are one of the first sectors to fall when the economy begins to weaken. As much as I dislike the notion that this sector will rally higher because the news coming out is simply "not as bad as expected," that's actually the norm for retail.

Take Aeropostale (NYSE: ARO  ) , for instance, which reported its second-quarter results last week. While beating already-lowered expectations by $0.01, the company drastically lowered its third-quarter guidance from a Wall Street consensus of $0.30 to a range of $0.09-$0.15. This compares to a profit in the year-ago period of $0.63. Aeropostale indeed got shelled on Friday and is hurting due to higher material costs and shrinking margins derived from the need to discount excessively to move inventory. Not to mention that the company is losing market share to Abercrombie & Fitch (NYSE: ANF  ) , which also warned of rising material costs last week.

What we need to remember with many of these retailers is that their balance sheets are sound, and as long as they remain profitable, eventually their stock price will find a bottom. Investing in apparel isn't about jumping into the lake, it's about wading in a little at a time -- and now is the time to get those feet wet.

Aeropostale has $73 million in cash with no debt and has been vigilant in buying back its own stock. Buybacks not only signal conviction in the company's long-term growth plans, but they also reduce the number of shares outstanding, potentially adding a boost to the company's bottom-line profits. Are Aeropostale's material cost and inventory problems going to be solved in the next three months? Probably not, but with Aeropostale trading at its lowest levels since late 2008, it's worth a look.

Other rivals that share some similar traits to Aeropostale that have crossed my radar include Gap (NYSE: GPS  ) , American Eagle Outfitters (NYSE: AEO  ) , and Zumiez (Nasdaq: ZUMZ  ) . Gap is a Rising Star buy of fellow Fool Jason Moser and is looking attractive with a forward P/E under 10 -- especially after maintaining its earnings guidance last week. American Eagle offers one of the most delectable dividends in the sector at 4% and maintains a squeaky-clean balance sheet ripe with $3.11 in cash per share. Finally, Zumiez sports a rip-roaring five-year growth expectation of 22%, but also has more than $4 per share in cash on its books with no debt.

These stocks are in no way surefire bets, nor am I calling a bottom in this sector with any accuracy (they ran out of crystal balls at the store three weeks ago). What I can tell you is this sector looks relatively cheap on a historical basis and that based on its cyclical nature, this is the point where edging your toes into the water has proven profitable for long-term investors.

Have you taken the plunge with any retail stocks over the past month? Share your thoughts and plays in the comments section below, and consider adding Aeropostale, Gap, American Eagle Outfitters, and Zumiez to your watchlist.

Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong. The Motley Fool owns shares of Gap and Aeropostale. Motley Fool newsletter services have recommended shorting shares of Zumiez. 

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 that requires a receipt for all returns and exchanges.

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