Seeking Alpha: American Eagle Trying To Fly Unfriendlier Skies

I continue to be impressed with the turnaround at American Eagle (NYSE:AEO), but the path ahead doesn't get any easier for this teen retailer. Production innovation, international expansion, and the growth of the "aerie" franchise all offer opportunities for growth, but margin leverage is going to be harder to come by and management will be challenged to prove that the recent run of strong performance is more than just a recovery from past missteps and/or taking advantage of weakness at competitors.

I wasn't all that impressed with the valuation opportunity back in the summer and the shares were down about 20% from that piece until a strong February rebound. I see more value in the shares now, but I do have some concerns that the Street's expectations for growth may be less than reasonable and that the shares could be punished if management "only" does a good job.

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American Eagle Trying To Fly Unfriendlier Skies

Seeking Alpha: Relative To The Risks, The Turnaround Rewards At Bebe Don't Impress

With shoppers seemingly on a general strike, there is no shortage of turnaround/recovery ideas in the apparel sector. It's different situation with bebe stores (BEBE), though, as this company isn't suffering from the fickle whims of teen fashion or the sudden drop in mall traffic. Rather, bebe has seen its reported sales decline year over year since 2008 and hasn't sniffed a double-digit operating margin since that same year.

The company has a turnaround strategy in place, as well as a CEO who is less than a year into the job. While management has done a good job of telegraphing what are likely to be ugly-looking numbers until legacy merchandise is off the shelves and out of the stores, I'm not sure the probable long-term gains are worth the pains. The shares do look a little undervalued, but bebe will have to go from its current stressed state to new all-time performance records to justify a target price that would make it a superior investing option to names like American Eagle (AEO) or Aeropostale (ARO) in the broader retail space.

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Relative To The Risks, The Turnaround Rewards At Bebe Don't Impress

Investopedia: Guess May Be Getting Its House In Order

Apparel and accessory designer and retailer Guess? (NYSE:GES) has been on a wild ride for the past couple of years as weakness in North American merchandising and operating performance, not to mention macroeonomic weakness in Europe, squared off with lucrative licensing income and the growth potential of an ongoing expansion into Asia. While Guess shares look set to jump on very encouraging fiscal second quarter earnings, the level of competition in apparel retailing in North America, Europe, and Asia makes it difficult to have a lot of confidence in the long-term outlook.

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Seeking Alpha: Esprit Holdings Already Priced For A Very Uncertain Recovery

Readers with a little gray at the temples may fondly remember back to a time when Esprit was a popular, or at least relevant, apparel brand in the U.S. A lot has changed since then, and Esprit Holdings (NASDAQ: ESPGY.PK) is now a global wholesale and retail apparel brand with a major presence in Europe and the hope of riding China's middle class to another era of growth. Unfortunately, Esprit has been in a five-year tailspin that has seen serious revenue, margin, and cash flow erosion, as well as the rise of numerous very competitive global retailing concepts. While there is a major discrepancy between the sell-side and buy-side of the Street regarding Esprit's future prospects, it's difficult to make the case that there's enough value here to speculate on a recovery.

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Esprit Holdings Already Priced For A Very Uncertain Recovery

Investopedia: As One Problem Fades At lululemon athletica, Another One Emerges

Even the most patient investor in lululemon athletica (Nasdaq:LULU) has to be dreading earnings release dates from this fast-growing athletic apparel company. Not only does this stock experience the normal volatility that goes with high-growth/high-expectation names (“You missed comps by a half-point? Off with your head!”), but the announcement of a major product defect (see-through pants) and now the CEO resignation have added even more turmoil.

Through all of this, lululemon has remained an impressive growth story, but maybe the cracks are starting to appear and competitors are starting to up their games as well. While I'm solidly on board with the idea of picking up growth stocks on pullbacks that don't seem related to material events, the loss of a quality CEO seems pretty material to me. Consequently, I'd be careful about piling into lululemon with the idea that a quick rebound is guaranteed.

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Investopedia: Have See-Through Pants Created An Opportunity In lululemon Shares?

For a stock with a take-no-prisoners valuation, the reaction to Lululemon Athletica's (Nasdaq:LULU) sizable product recall has been quite restrained. Even with a defective batch of the company's top product taking steam out of the first quarter's comp growth, this company is still growing and seeing good success in broadening its product offerings. While there is a limit to how many missteps customers will tolerate from a company selling premium-priced products, Lululemon has been relatively proactive and upfront in dealing with the issue. Although I still believe the growth expectations here are still pretty aggressive, investors who believe otherwise could see this as an opportunity to pick up shares.

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Seeking Alpha: Incredible Growth Makes ASOS A Must-Watch Name

Online retailing has led to massive changes in business like book publishing/retailing, consumer electronics, music, and media. Heretofore, though, its impact on apparel retailing has been less profound, in part because of the customer service issues of dealing in products where fit, feel, style, and so on complicate the delivery model. Britain's ASOS (ASOMY.PK) is looking to change this with a disruptive customer-centric model that could ring major growth in the years to come.

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Incredible Growth Makes ASOS A Must-Watch Name

Seeking Alpha: Living In The Fast (Retailing) Lane Comes At A Price

Apparel retailing can be a surprisingly cyclical business, and not just because of economic cycles. Plenty of U.S. apparel companies, ranging from Gap (GPS) to American Eagle (AEO) to Abercrombie & Fitch (ANF) have enjoyed periods where they could do no wrong with merchandising or marketing, only to see the crowds leave without warning and take their sales with them. What's more, as a store's footprint grows, it becomes increasingly difficult to maintain an impressive or satisfying level of growth.

One solution that apparel companies have found is to go global. Gap and Abercrombie & Fitch have taken their shows on the road (with not a lot of success thus far), as have European retailers like H&M (HNNMY.PK) and Inditex (IDEXY.PK). Looking to the other side of the globe, Japan's Fast Retailing (FRCOY.PK) looks like a name to watch as the company looks to maintain double-digit growth through expansion in Europe, the U.S., and Asia with its proven strategy of savvy marketing, competitive pricing, and high-quality unique merchandise.

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Living In The Fast (Retailing) Lane Comes At A Price

Investopedia: lululemon Continues To Deliver High-Priced Performance

"Pay for performance" has long been a mantra on Wall Street, and it's a little harder to condemn athletic apparel maker lululemon athletica (Nasdaq:LULU) for its valuation when it continues to perform as well as it does. Not only does the company continue to move truly impressive quantities of premium-priced merchandise, but the company's cautious inventory and expansion philosophies mitigate some of the normal retailing risks. All of that said, investors aren't getting any bargains in these shares.

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Investopedia: Has Abercrombie & Fitch Turned The Corner?

Clothing retailers are not typically included in lists of cyclical industries, but I would challenge investors to look at the long-term performance of companies like American Eagle (NYSE:AEO), Buckle (NYSE:BKE) or Aeropostale (NYSE:ARO) and not conclude that sizable up-and-down swings are just part of the fabric of this business.

With that in mind, it was tempting to argue during Abercrombie & Fitch's (NYSE:ANF) recent struggles that "this too shall pass," and that the company will eventually turn around its operating performance. While Abercrombie's third quarter performance was certainly surprising, and stimulated a major move in the stock, investors may want to be cautious in assuming that the worst is now past.

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Investopedia: Bonkers Expectations May Still Be lululemon athletica's Biggest Challenge

It looks like the momentum trade is back "on" for lululemon athletica (Nasdaq:LULU) as investors cheered a solid second quarter and encouraging third quarter guidance. With lululemon's comps remaining in the double-digits and demand continuing to outstrip supply, the biggest challenge for this company may simply be living up to expectations. Although this remains one of the strongest-growing and most productive stories in retailing, valuation and expectations look more than a little breathless.

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Investopedia: Lululemon Slips During Its Highwire Act

You can think of Canadian specialty athletic clothing retailer Lululemon Athletica (Nasdaq: LULU) and the Street's reaction to this quarter, in this way: When you're just walking along the street and have a slight stumble or slip, it's no big deal; nobody notices, nobody cares and you probably don't even break stride. Now, imagine having that same stumble when you're on a wire fifty feet above the ground, with thousands of people staring up at you; the consequences of a mistake are a bit higher.

Some Spots Show Up in the Third Quarter 

Lululemon has gotten this far, largely on the basis of promising good growth and then delivering even better results. Not this time, though. Although 16% comps growth would be a level of performance that the CEOs of Gap (NYSE: GPS), American Eagle (NYSE: AEO) or Kohl's (NYSE: KSS) would sell a family member to get, it's not going to satisfy the Lululemon crowd, when the last quarter's performance was 20%. Moreover, sales growth of 31% was quite nice, but the company actually missed the average sell-side guess by about $5 million.

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Investopedia: Can Retailers Pass The Back To School Test?

Across the country, a traditional rite of fall has either begun or is soon coming - the resumption of school. With the return to school goes an annual pilgrimage to the malls and shopping centers to equip the little tykes with the clothing, electronics and other supplies that they need to start the school year. For many retailers, this is the second-biggest shopping event of the year (after Christmas), but ongoing economic malaise may make this a tougher test this year. (If you have to do back-to-school shopping, check out Best Back-To-School Deals.)


Another Sluggish Season?
According to surveys from the National Retail Federation, this is not looking like an especially robust year. More specifically, it looks like per-family spending may dip slightly from last year (by about half a percent) to about $604. While this is certainly better than the 2009 malaise of $549 per family, it marks another year where retailers cannot rely on fatter wallets to boost their own profits.

Absent more money sloshing around the market in general, retailers will have to pull out the stops to lure shoppers into their stores. Going back to the NRF survey, customers are saying that they will rely more on discount stores, online shopping and sales, but they will not necessarily abandon the name brands and up-market products altogether.


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Investopedia: Lululemon's Growth Moots The Valuation

Traditional value investors probably didn't like Lululemon Athletica (Nasdaq:LULU) before Friday's earnings report, and they are not likely to appreciate it any more afterward. So, for those who think the secret to successful stockpicking is in targeting single-digit EV/EBITDA ratios, sub-1.0 PEG ratios, or similar formulas, Lululemon just is not going to work for them. 

For growth investors, though, this is a name that just keeps delivering the goods. There will be a day of reckoning, a day when the growth disappoints and investors suddenly realize that the low-hanging fruit has been plucked, but that day isn't today and it does not look like it's going to be tomorrow either. In the meantime, aggressive investors may continue to benefit from one of the most dynamic stories in retail.







A Strong Start to the Fiscal Year
Lululemon delivered 35% revenue in the fiscal first quarter, with comp-store sales up 16% in constant dollar terms. Few retailers are approaching this sort of growth these days. That said, it looks like maybe Wall Street has caught up to the name a bit - the company did surpass the average analyst estimate, but not by much and the company definitely did not beat the highest end of the range.


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Investopedia: American Eagle's Down But Not Out

Nothing lasts forever in retailing; anyone younger than 35 probably has no idea what a "blue light special" is and once-popular retailers like Montgomery Ward and Service Merchandise are long gone. Even on a less dramatic level, there is a definite cyclicality to the retail business - few companies can manage their merchandising without missteps for years at a time, and that has been especially true in teen retailing. 

That said, it seems like too many analysts and investors are counting American Eagle Outfitters (NYSE:AEO) out of the fight prematurely. True, the company's same-store sales are not good right now, but this retailer is far from a goner and new leadership could be the catalyst to a more significant turnaround. (For background reading, check out The 4 R's Of Retail Investing.)

American Eagle's Disappointing Start to the Fiscal Year 

There wasn't much good news for American Eagle to crow about this quarter. Revenue dropped 6% (and missed estimates by more than 4%) as comps fell a surprising 8%. Sales were especially weak in women's merchandise as comps here were down 10% (versus a 5% drop in men's). Online sales were not much help either, as sales rose just 3%. 

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Investopedia: How Far Can Lululemon Stretch?

By any reasonable standards, lululemon athletica (Nasdaq:LULU) has been a fantastic stock over the past two years. Not only has it tripled in value since its debut, but investors who loaded up on these shares in a big way in early 2009 are also looking at a 10-bagger or better. An investor only needs to hit a couple of those in a lifetime to do very well indeed.

But the big question is whether lululemon can maintain the momentum. Everything looks great for the company today, but grizzled retailing investors have seen stories like lululemon before and unfortunately, many of these stories do not have happy endings. (For background reading, see Analyzing Retail Stocks.)

A Solid End to the Fiscal Year  
For a company with a track record of blowing away estimates, lululemon's fiscal fourth quarter results were surprising only to a certain degree. Revenue jumped 53% and surpassed the top end of the analyst range, helped in large part by comp-store growth of 28%. Direct-to-customer sales growth was also strong (up 152%), but still constitutes a fairly low percentage of sales.

LULU once again coupled strong sales with impressive operating leverage. Gross margin jumped almost five full points, and the company's operating income grew 72%. LULU has exceptional operating margins for the retail sector - they're at 29% (up from just under 26% a year ago) - and the company once again delivered earnings per share well in excess of analyst expectations. (For more insight, see The Bottom Line On Margins.)

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Investopedia: Urban Warfare

When a company's management spends part of their earnings conference call talking about a company's ten-year trends and history, that is often a bad sign. Such is the case for Urban Outfitters (Nasdaq:URBN). However impressive Urban Outfitters' past may be, it is not going to spare the stock today as investors focus on worrisome developments in margins and inventory. 

A Sour Note To End 2010
Urban Outfitters did report 14% overall sales growth for the fourth quarter. That is pretty much it for the good news. That sales level was a bit below analyst expectations, and store comps were down 2% as transactions fell about 1%. On a slightly more encouraging note, sales comps were up 4% if direct-to-consumer sales are included.

To its credit, Urban Outfitters has managed to do what American Eagle (NYSE:AEO) and many other retailers have struggled to do - operate multiple successful brands. The core Urban Outfitters brand saw revenue increase 13% this quarter, with Anthropologie up 10% and Free People up 35%. URBN also has a successful direct-to-consumer business, and revenue here jumped 28%.

Turning back to bad news, the company saw gross margin shrink more than 2% as the company had to get more aggressive with markdowns to move product. SG&A growth matched sales, though, and the company saw operating income tick up 1% while operating margin fell more than 2%. Taxes also came in above analyst expectations, contributing a few pennies to the company's earnings miss.


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Investopedia: Can Chico's Be Chic Again?

Women's retailer Chico's (NYSE:CHS) was a great growth stock for almost a decade, profiting off its relatively fashionable offerings for working women and ability to differentiate itself from the likes of Gap (NYSE:GPS), Limited Brands (NYSE:LTD) as well as mall anchors like JCPenny (NYSE:JCP) and Dillards (NYSE:DDS). But then Chico's experienced what almost all retailers experience - merchandising missteps, overexpansion, questionable acquisitions and a customer base that just wants to shop somewhere else for a change. 

The good news for retail investors is that there are certainly second acts in retailing (as well as third, and fourth). The question, though, is whether Chico's has whipped itself into shape in time to take advantage of an improving market. (For related reading see 5 Retail Stocks For 2011.)

An Iffy End to the Year
Chico's did not report especially exciting numbers for the fourth quarter, but the market was expecting worse so it all netted out to a "positive quarter", especially as the company gave encouraging sales growth guidance for fiscal 2011.



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Lululemon Masters The Upward-Profits Pose

I am not aware of a "ring the cash register" pose in yoga, but if there is one, I have no doubt that Lululemon Athletica (Nasdaq:LULU) has mastered it. Combining a healthy living and pro-environment shtick with truly well-designed, well-crafted and well-marketed apparel, Lululemon is carving out a very successful niche in women's athletic apparel market and driving value-centered investors to distraction. 

A Limber Third Quarter
It is a real challenge to find a metric in which Lululemon did not excel in its fiscal third quarter. Revenue jumped almost 56% to $176 million, leaving the highest published estimate in the dust. Likewise, comp-store sales growth of 29% was outstanding and the company produced an eye-popping amount of productivity (nearly $2,000 in sales per gross square foot of selling space, on an annualized basis). Sure, that's less than what, say, Tiffany (NYSE:TIF) does, but they sell diamonds! Compared to other clothing retailers, even solid performers like Urban Outfitters (Nasdaq:URBN) or Limited's (NYSE:LTD) Victoria's Secret cannot come close to that level of performance. 


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Abercrombie & Fitch Back On Track

If there is a Teflon-coated retailer, there are strong arguments that Abercrombie & Fitch (NYSE:ANF) is the one. ANF routinely gets roasted for its highly sexualized advertising, its past problems with human resources (allegedly putting only the more attractive employees on the selling floor) and its somewhat questionable management stewardship.

And yet, its core teen-to-college market keeps coming back in droves. True, the company had a serious valley in same-store sales throughout much of 2009, but a quick look at the other A-type teen retailers Aeropostale (NYSE:ARO) and American Eagle Outfitters (NYSE:AEO) shows that ANF's experience was not entirely unique. Now that the economy is picking up a bit, it seems that the customers are more than happy to come back to ANF for its premium-priced wares. 


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