In early 2011, shares fell from around $18 to near $10 after earnings per share decreased 58% and same-store sales fell 7% in its first quarter. But in less than a year, and bolstered by beating lowered expectations, the company’s shares rebounded to over $20.
In its latest quarter, results were horrendous. Sales decreased 6% from last year with same-store sales collapsing a staggering 15%. The company also reported an adjusted net loss of $26.9 million thanks to a challenging teen-retail environment with weak traffic trends and high levels of promotional activity. Management expects this tough teen-retail environment to continue.
Aeropostale, Inc. (NYSE:ARO)’s shares look appealingly discounted if the company can achieve normalized sales of $2.3 billion and cash earnings of $80 million at a profit margin around $3.5%, a margin similar to that made in 2012. Admittedly, recent results suggest that may be unlikely. Nonetheless, the company, with no meaningful debt, seems to have the time to try to reach a reasonable fair value of around $12 a share with normalized results at a reduced 12 times multiple.
Abercrombie & Fitch Co. (NYSE:ANF) is a well-known specialty retailer that sells a broad array of casual apparel under the Abercrombie & Fitch Co. (NYSE:ANF) and Hollister brands. The company recently posted weak quarterly results with net income falling 33% from 2012 and comparable sales for the quarter dropping a surprising 10%. The company’s poor sales performance was due to weaker traffic and continued softness in women’s goods.
In early 2012, Abercrombie & Fitch Co. (NYSE:ANF) faced a like setback when quarterly income came in at $3.0 million, compared to $25.1 million a year earlier, and comparable-store sales declined 5%. That disappointment was due to poor European sales and higher cotton costs hurting profit. The shares dropped from around $49 to $30 in response. Yet, thanks to a slight turnaround and reduced expectations, the stock topped $50 within a year.
Abercrombie & Fitch Co. (NYSE:ANF) shares currently look nearly bargain priced, given normalized sales of around $4.6 billion, cash earnings of $300 million, and a cash profit margin of around 6.5% compared to a 2012 margin of 7.6%. Its reasonable fair value is around $52 per share at an industry-standard 14 times multiple.
Conclusion
Fashion retailers occasionally miss a trend. In doing so, their shares are usually shunned. But these apparel vendors have shown a resilient ability to turn things around, often fairly quickly. So, the most opportune time to consider picking up some shares in these out-of-favor names may be when they are the most disdained.
The article There’s Profit in Playing Out-of-Favor Fashion Retailers originally appeared on Fool.com and is written by Bob Chandler.
Bob Chandler has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.
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