Which Beaten-Down Apparel Retailer Should Investors Choose?

Apparel retailers seem to be beaten down these days. American Eagle Outfitters (AEO -2.20%), Aeropostale (AROPQ), and Express (EXPR) all got crushed because of their cloudy full-year outlooks.

All three retailers experienced significant declines
Aeropostale has seen its share price cut in half due to its sluggish performance in the second quarter, continued market share losses, and the challenging teen retail environment. In the third quarter, it also posted disappointing quarterly results with weak sales in its core categories, including graphics and fleece. Its net sales dropped by 15% to $514.6 million, while its adjusted earnings per share came in at a loss of -$0.29 per share. Comparable sales, including the e-commerce channel, declined by 15%. 

Express was next with more than a 20% drop in a single trading day. Although Express reported results that included a 7% increase in sales, 15% growth in diluted EPS, and 5% comparable sales growth, the retailer cut its full-year guidance which made Wall Street feel pessimistic. For the full year of 2013, Express reduced its EPS estimate from $1.52-$1.60 to $1.46-$1.51, while estimating that comparable sales will be in the low-single digits. The reason for Express' cloudy full-year outlook was its weak Thanksgiving-week sales, along with the competitive and promotional retail environment. 

American Eagle Outfitters has also been viewed pessimistically by the stock market. In the third quarter, its sales declined 5.8% to $857.3 million while its EPS came in at $0.19, beating the analysts' estimate by $0.01. Its same-store sales dropped by 5% in the quarter. Despite the fact that American Eagle Outfitters beat Wall Street's estimate in the third quarter, it released disappointing fourth-quarter guidance that called for estimated EPS of only $0.26-$0.30, much lower than the estimate at $0.39, and a mid-single-digit decrease in same-store sales. 

Which should you choose?
With declining performances and cloudy outlooks in the competitive retail environment, if investors wish to invest in retail businesses we should be very careful to pick the safest retailer.

Among the three, Express seems to be the least preferable as it is using the most financial leverage with debt/equity of 47.1%. Investors should not be worried about Express though because it has quite a good cash position of more than $181.5 million along with its long-term debt of $199 million. Interestingly, Aeropostale and American Eagle Outfitters also have strong cash positions without any debt on their balance sheets. American Eagle Outfitters and Aeropostale have cash on hand of $354.3 million and $68 million, respectively.

While Aeropostale and Express do not offer dividends, American Eagle Outfitters gives shareholders quite a good dividend yield of 3.10%.

In terms of EBITDA multiple valuation, American Eagle Outfitters is also the most preferable as it has the lowest EBITDA multiple of the group. Aeropostale, with its declining operating performance, has the highest EV/EBITDA multiple at 8.24.

My Foolish take
American Eagle Outfitters seems to be the best retailer among the three because of its strong debt-free balance sheet, its decent dividend yield, and its low comparable valuation. Looking forward, American Eagle Outfitters will try to deliver better results by closing underperforming stores to strengthen its fleet and sharpening customers' shopping experience.