One of the good things about working at the Fool is that everyone's got something interesting to say, and not just those of us who tap out Takes for the front page. I was reminded of this yesterday when I was blabbing about one clothing retailer or another, and one of the editors said that he would think twice about investing in any such company because of fashion risk.
You know -- the idea that sooner or later the company might get it wrong, go out of style, miss out on a season, discount like crazy, or see major negative leverage as margins collapse from top to bottom?
Here's my take on it: If you invest in clothing retailers, it's not a matter of if this will happen to you, but when. That's right, unless you've got a real crystal ball, you are guaranteed to see this happen.
But that's no reason to avoid one of the most robust businesses around, the kind of stocks that can make you a ton of money. These companies can grow like crazy, for long periods of time. Another reason I like them is that they're relatively easy to evaluate. They buy stuff for one price, sell it for another, pay rent and salaries, and what's left over is yours.
There are two ways to weather these storms and increase your odds with clothing retailers, and neither involves trying to predict fashion or spending trends. I don't know what people are going to pay to wrap themselves up in next month, next winter, or next year. Nor, would I say, does the analyst down the street. Nor, I bet, do you. You know who might? The people running retailers.
One example: If I had a dime for every time someone laughed at me about owning shares of '90s "rerun" Guess? (NYSE:GES), I'd have a lot of money. Of course, it wouldn't be as much as I've made by ignoring the know-nothing predictions out there and instead betting on what I could see happening to the company's sales and operations (improving).
The first is to buy these things when they're already priced as if they've gotten it wrong and will continue to get it wrong. That was the case with Abercrombie & Fitch (NYSE:ANF) last fall, and even after the recent big drop, the stock has still returned 27% since last year. I would argue that the current pessimism over consumer spending is offering similar opportunities with Pacific Sunwear (NASDAQ:PSUN), Aeropostale (NYSE:ARO), Motley Fool Stock Advisor pick Gap (NYSE:GPS), and others.
Another strategy is to hold only the best, and I do mean hold. As I remarked, it's pretty easy to see who the leaders are in sales, margins, and returns. World-beater Chico's FAS (NYSE:CHS) may stumble someday, but its growth and earnings power are cushy cushions against short-term failures, and it's tough to believe that a management team that's gotten it so right for so long will fall and not get back up. There may be tough times, but remember, in terms of market cap, Chico's is still only half as big as Gap. It would be seriously foolish (small "f") to assume that it can't keep growing and achieve Gap size, or even get bigger.
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Seth Jayson would always rather spend on clothing stocks than clothes. At the time of publication, he had shares of Guess?, Aeropostale, and Pacific Sunwear but no positions in any other company mentioned. View his stock holdings and Fool profile here. Fool rules are here.
