Abercrombie & Fitch Co. (ANF), Aeropostale, Inc. (ARO): Two Losers, Two Winners and a Hidden Gem in Teen Apparel

Same-store sales declined 2.9%, with its namesake stores declining 3.0% while its Arden B. chain rose 0.9%. Wet Seal’s namesake stores are focused on teen apparel, while Arden B. concentrates on young women.

Although The Wet Seal, Inc. (NASDAQ:WTSL)’s profit was merely in line with the consensus estimate and revenue missed completely, shares rallied more than 12% following earnings on May 28. That rally was apparently fueled by renewed faith in CEO John Goodman’s turnaround efforts, which include a fast-fashion (rotation) strategy and workforce reductions.

While these improvements are encouraging, I would like to see more improvement in operating margins, free cash flow and earnings per share before I consider this a worthwhile investment.

For the full year, Wet Seal expects same-store sales to rise to the mid-single digits, which would be an impressive reversal from the 11.1% decline it reported a year ago. If Wet Seal can hit those targets and improve its cash flow and margins, then I believe that it could be a hidden gem in the retail sector.

The Foolish bottom line

In closing, the teen apparel sector is a lucrative and dangerous market. The failures of Abercrombie & Fitch Co. (NYSE:ANF) and Aeropostale, Inc. (NYSE:ARO) serve as cautionary tales of relying too heavily on a single demographic. The success of Gap shows us that diversifying a company’s portfolio, just as investors should spread out their investments, is a sound business strategy in tough times. Urban Outfitters demonstrates that younger shoppers want humorous and ironic graphic tees, rather than large, bland company logos. Lastly, if Wet Seal can get its act together in 2013, then it could become a solid contender in the teen apparel market, drawing heavily on the appeal of H&M and Forever 21.

Teen shoppers are a fickle bunch, and the numbers don’t lie – creativity, fast rotation, and low prices are the keys to winning this battle.

The article Two Losers, Two Winners and a Hidden Gem in Teen Apparel originally appeared on Fool.com and is written by Leo Sun.

Leo Sun has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Leo is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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