Teen-focused retailers like American Eagle Outfitters (NASDAQ:AEOS), Motley Fool Stock Advisor pick Gap (NYSE:GPS), and Abercrombie & Fitch (NYSE:ANF) get most of the headlines because of their well-earned past success. However, it would be a mistake for retail-focused investors to ignore smaller and lower-profile teen retailers such as Deb Shops (NASDAQ:DEBS) and Buckle (NYSE:BKE).
Both lack the big boys' coast-to-coast coverage, but both companies' stocks have easilybeaten the S&P 500 over the past five years. And while their small size may give them a bit of a disadvantage in scale, it also gives them greater opportunities for expansion.
This morning, Deb Shops continued the good news, announcing a robust holiday selling season. Deb notched a 4.5% increase in December's same-store sales and a 4% rise in total sales. Those increases may sound small, but their bottom-line effect is magnified, because Deb Shops has also been driving its margins higher over the last two years, back toward the levels the company enjoyed in 2002 and 2003.
These margin improvements evidently helped the bottom line in the company's current fourth quarter. Deb Shops also announced that it is raising earnings guidance for fiscal 2006 (ending Jan. 31st) by three cents, up to $1.68 to $1.73 a share from $1.65 to $1.70 a share. That's good news, but it's more important to pay attention to the company's free cash flow. On average, it's been higher than the company's net income over the last five years. Unfortunately, Deb Shops didn't provide free cash flow guidance -- few companies do -- which means we'll all need to wait until the company reports its final numbers in February to see what the full story is.
Currently, Deb Shops and Buckle both trade near a price-to-free cash flow ratio of 16. I'd give a slight edge to Buckle for its higher dividend yield (2.1% vs. 1.6%) and because I believe its growth over the next few years should be higher than Deb's. But in truth, it's hard to go wrong with either of these companies. Buckle's been buying back shares, and both companies have a history of returning value to shareholders via dividends as well.
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Nathan Parmelee owns shares in American Eagle Outfitters and has a beneficial interest in Gap shares. He has no financial stake in any of the other companies mentioned. The Motley Fool has an ironclad disclosure policy.
