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The Wet Seal, Inc. (WTSL), Aeropostale, Inc. (ARO), Abercrombie & Fitch Co. (ANF): Is This Teen Retailer Ready To Trade Higher?

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The Wet Seal, Inc. (NASDAQ:WTSL) is a small retailer, but is still part of the teen industry that has been crushed over the last few months. Competitors Aeropostale, Inc. (NYSE:ARO), American Eagle Outfitters (NYSE:AEO), and Abercrombie & Fitch Co. (NYSE:ANF) have all seen horrific fundamental performances, yet Wet Seal is starting to show signs of moderate improvements.

The Wet Seal, Inc. (NASDAQ:WTSL)

A telling tale of performance

Like I said, all four retailers focus on teens, but a rise in e-commerce and a change in style has left all with rather sloppy fundamental performance. Over the last month, the stock performance of these companies are as follows:

Company Stock Performance (before 8/27)
Wet Seal (16%)
Abercrombie (27%)
American Eagle (24%)
Aeropostale (43%)

Aeropostale, Inc. (NYSE:ARO)’s industry-worst performance was due to the nature of its earnings report, which was simply terrible. The Wet Seal, Inc. (NASDAQ:WTSL) had lost the least value, but had not yet announced earnings.

How’s the fundamentals?

On Tuesday, The Wet Seal, Inc. (NASDAQ:WTSL) announced earnings after the market closed, and is currently trading higher by 9%. It was the first of the four companies to actually trade higher following its report. With that said, let’s take a look at a few key metrics from each company’s report; metrics that are most important.

Company Sales Growth (year-over-year) Comp Growth (year-over-year) Gross Margin Growth (year-over-year)
Wet Seal 1% 3.7% 680 basis point
Abercrombie (1%) (10%) 160bp
American Eagle (2%) (7%) (360bp)
Aeropostale (6%) (15%) (740bp)

Take a minute to soak in the three key retail metrics for each company, and then realize who flourished.

The Wet Seal, Inc. (NASDAQ:WTSL) had the greatest overall sales growth, comparable growth, and improved its gross margin the most. Compared to other retailers, Wet Seal’s quarter was phenomenal.

Other than The Wet Seal, Inc. (NASDAQ:WTSL), I think the market mostly got performance-for-earnings right. Abercrombie & Fitch Co. (NYSE:ANF) and American Eagle Outfitters (NYSE:AEO)’s quarter was similar, with Abercrombie’s comps declining more rapidly, but American Eagle seeing its gross margin fall faster.

Aeropostale, Inc. (NYSE:ARO) was by far the worst, in all three of the noted categories, and is why the stock declined 43% in the last month. However, it was also the company’s harsh guidance to close stores at a faster rate and its anticipated decline in comp sales.

Both Abercrombie & Fitch Co. (NYSE:ANF) and American Eagle noted a weakening environment toward the end of the quarter, yet Wet Seal reiterates mid-single digit comp growth expectations.

What about valuation?

While we see that performance matches fundamental performance — suggesting the market correctly traded these stocks – valuation must also be considered. Clearly, Wet Seal had the best quarter, but is it cheap enough to buy, and is any other retailer presenting value?

Wet Seal Abercrombie American Eagle Aeropostale
Market Cap $345 million $2.78 billion $2.82 billion $660 million
Trailing P/E n/a 11.92 13.21 n/a
Forward P/E 16.23 11.07 12.59 31.22
PEG Ratio 1.01 1.14 1.76 n/a
Price/Sales 0.60 0.63 0.82 0.29
Operating Margin (6%) 8.6% 11.3% 0.46%

At first glance, you might look at Wet Seal’s forward P/E ratio compared to Abercrombie & Fitch Co. (NYSE:ANF) and American Eagle and then assume that no value is present. However, this is where operating margins come into play, Wet Seal is a company with margins on the rise, and with a lot of room to improve. Abercrombie and American Eagle do not have this luxury in a competitive pricing environment.

The more important metric is PEG, which is expected growth over a longer period of time compared to valuation. With this metric, Wet Seal is clearly the cheapest of the bunch.

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