Just because a stock beats analyst expectations does not make it a good investment. Especially if that stock represents one of the most unpredictable spaces in retail – teen fashion.
The Wall Street Journal illustrated the point with a tale of two retailers.
Beating Expectations Isn’t Everything
American Eagle Outfitters Inc. (NYSE:AEOB) beat expectations Wednesday reporting an increase in same store sales of 3%, which represented the sixth consecutive period of growing same-store sales. It wasn’t enough. Shares fell 3.3% and closed at $18.33, down $0.63.
Fickle Is As Fickle Does
Investors know that teens are fickle. What they love (in clothing) Monday could well become what they hate Wednesday. Nothing lasts forever. Certainly not in fashion.
Nomura analyst Simeon Siegel put it this way: “Mall-based retailers are allowed to have a one-to-two-year strong product run. You have to catch it at the beginning.”
In the case of American Eagle versus Urban Outfitters, positive sales growth is only part of the story.
In short, American’s sixth straight quarter of growing same store sales did not trump the fact that Urban appears to be moving up. The company reported improved gross margins a sign it had not had to mark down much of its inventory.
Such is not the case. American Eagle and friends have gone for an average of 16.8 times forward earnings. The aforementioned “stable” retailers have sole for an average of 14.7 times forward earnings.
Better Buys To Be Had
The Street’s Jim Cramer likes the 3 major retailers already mentioned – Macy’s, Nordstrom and Kohl’s. Last week Cramer said the stocks were priced for Armageddon but Armageddon never came. Importantly, he says all 3 have room for growth and are worth considering.
Despite the fact Target Corp. (NYSE:TGTB) lowered full-year earnings guidance by 6%, resulting in a 5% drop in stock prices, the company has investor fans. Those fans view recent trades at less than 15 times forward earnings and a 3.4% yield as an indication the stock could be a potential bargain.
Finally, Money Magazine listed The TJX Companies Inc. (NYSE:TJXB), home of off-price retailers, T.J. Maxx and Marshalls as somewhat “online retailer proof.” That’s a bold statement but Buffalo Large Cap (BUFEX) Mutual Fund manager, Elizabeth Jones says, “People like to buy name brands at a discount and in real time.”
In addition, Jones points out that home products make up a quarter of TJX revenue and the company has benefited from the housing market recovery.