American Eagle Outfitters (AEO), Abercrombie & Fitch Co. (ANF): Make Fashion a Part of Your Portfolio

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The economic recovery in the United States has helped people achieve solid profits on their equity investments since 2009. Even though the financial meltdown is now part of our history lessons, it is not uncommon to find people who still perceive the current market condition as a bubble ready to burst. I am not one of the pessimists, and I believe that the market still has potential going forward, but it doesn't really hurt to take a cautionary approach to investing.

American Eagle Outfitters (NYSE:AEO)The clothing industry presents a very decent choice for risk-averse investors. The demand for clothes is always going to be there; no matter if it’s going to be a time of recession or a boom in the country. American Eagle Outfitters (NYSE:AEO), Abercrombie & Fitch Co. (NYSE:ANF) and Ascena Retail Group Inc (NASDAQ:ASNA) are three apparel companies that can become a part of your portfolio. Each of these three companies has a unique story.

Online is the new trend

With a focus towards teenagers and young adults, American Eagle Outfitters (NYSE:AEO) is my first choice from the apparel industry. The company’s retail outlets are present in 16 countries worldwide, whereas its e-commerce operations help it to sell products to customers in 81 countries.

The company’s e-commerce operations helped it grow revenues more than 25% in 2012. American Eagle Outfitters (NYSE:AEO) has great potential going forward; it has the ability to stay on top of any changes in contemporary fashion, and has strong customer engagement. The company has a disciplined inventory control system, as it employs the Just-In-Time strategy to manage inventories. This makes the company avoid surplus inventory situations, therefore leading to lesser chances of the company offering discounts or markdowns.

Another great thing about this company is its focus on international expansion. The company recently acquired its six franchise stores in China and opened a new one in Mexico. In the Philippines, the company has given a go-ahead to its first franchise store. I believe the company is on the right path with great potential for growth in the coming years.

Loyal customers for this apparel manufacturer

Abercrombie & Fitch Co. (NYSE:ANF) has three segments: U.S. stores, International stores and Direct-to-Consumer, through which it targets men, women and kids. The major portion (almost 42.4%) of revenues comes from internet & catalog orders. Other sources of revenues include the company’s brand stores, Hollister stores, and the Gilly Hicks & Abercrombie & Fitch Co. (NYSE:ANF) kids stores.

The company’s 1Q13 results were a shocker, as the company’s revenues went down by almost 42% on the QoQ basis. This was the result of an unexpected shortage of inventory rather than a decrease in demand for the company’s widely popular clothes. Abercrombie & Fitch Co. (NYSE:ANF) is very confident that its business model has the potential to achieve growth in the coming years and such glitches in its inventory systems will only help it to debug and solidify its systems.

Abercrombie & Fitch Co. (NYSE:ANF) has a very loyal following among its customers, which it can rely on for its revenues. Its brand image has high recall and is very recognizable among specific young age groups. This is the reason why the company is able to sell its highly priced products, even though economic conditions are not right for such a strategy. As a large percentage of the company’s sales are already through its online portal, I expect it to perform well in the coming years.

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