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Tags: gil | shidlo | Summer | seasonal | Buys | Fashion | retail

Summer Buys That Will Be in Fashion All Year Round

Tuesday, 12 July 2011 07:57 AM

During the summer months, the volume of shares traded tends to decrease as Wall Street executives and traders head for the Hamptons and retail investors go on vacation.

In Europe, many businesses close down for the whole month of August, especially in countries like France, Italy and Spain.

Still, there are opportunities for investors during this hot season.

There is one sector which is most affected by seasonality. We mentioned energy consumption going up in hot weather last week.

Although most consumers are busy shopping for markdowns of summer clothes and swimming gear, savvy investors should look around and see which merchants have more markdowns and which are better at getting rid of unsold summer merchandise.

During the month of July, the kids’ fashion industry is positioning itself for the second most-important season of the year – "Back to School" – and emptying shelves of bikinis, sandals and shorts.

Companies like Abercombie & Fitch, American Eagle, American Apparel and Gap will start stocking up on autumn clothes and uniforms ahead of the new school year. But it is not only apparel companies that benefit from ‘Back to School’ - students tend to buy new laptops, PCs, tablets and smartphones during July and August.

There is the usual competition between Microsoft and Apple for college students. Although college students would opt to buy a Macbook if money was not an issue, not all can afford them. Microsoft is offering a free Xbox 360 (4G) to students that spend over $699 on a Windows 7 based PC. Apple, on the other hand, is offering to students who buy a Mac a $100 voucher, which can be used for any Apple product or iTunes. It is not only Apple and Microsoft that will benefit, but also Amazon, which sells these electronic gadgets and smartphones.

The June monthly retail sale figures at stores open at least one year rose by 7.2 percent from last June, with the majority of retailers beating analysts’ expectations. One explanation for this sharp increase in sales is the reduction of gasoline prices in June, from a recent high of almost $4 a gallon. Warm, dry weather also helped as Americans bought new summer clothes. In addition, retailers had great bargains, even though the price of cotton is at a multiple-year high.

Although average sales figures are higher, not all retailers are equal – luxury merchants like Saks and Neiman Marcus had double-digit sales growth as their clientèle are less susceptible to price increases than mid-market retailers like Gap, where a $5 to $10 increase in price will have a greater effect on consumer decisions. Still, the strong retail sales data lifted the whole sector, except J.C. Penney, which dropped due to lower sale figures.

Should one invest in this sector after a rally which pushed most of these shares to a 52-week high? If one looks at valuation, most of these companies are already pricing in the good sales figures.

If one studies the valuations of the major apparel stores (like Abercrombie & Fitch, Gap, Urban Outfitters, American Apparel, Ralph Lauren, Guess and the Limited), and department stores (like Target) as well as luxury stores, one might hesitate in investing new money in this sector as they are highly priced.

Another way to analyze this sector is to try and predict which brands kids prefer this year – normally kids make the decisions what to wear.

During a recession, a large segment of the population will opt for the lower end of the market, where there is not much pricing power. With the price of cotton at a near historic high, it is only the high end of fashion that can increase prices without annoying their clients. A $5 to $10 increase on an $80 pair of jeans or jacket won’t make much of an impact on the person buying it in a high-end retailer. Still, the top three brands favored by Generation Y are Hot Topic (HOTT), American Eagle Outfitters (AEO) and Aeropostale (ARO). Of these three shares, two are not trading at a 52-week high – American Eagle and Aeropostale.

Several companies in the apparel industry are not at a 52-week high but one should also beware of heavy insider selling. One such company is Guess, which has a forward price-to-earnings, or P-E, ratio of 11.13 and price-book ratio of 3.68. Guess Founder and Chairman Maurice Marciano sold about 600,000 shares with an approximate value of $25 million in recent months.

The recent takeover of Timberland (TBL) by VF Corporation (which owns 30 famous brands including Vans, the North Face, Nautica, Jan Sports) for about $2 billion was unusual in that when the takeover was announced, VF’s price went up 10 percent.

Normally, the acquiring company’s price goes down, especially when the takeover is at a high premium - Timberland was acquired at a 40 percent premium. VF Corporation (VFC) has strong brands in the mid-level and top range of the market, which is relatively price inelastic, which means changes in price have a small effect on the quantity demanded.

VF intends by 2015 to sharply increase its international sales to about 40 percent in Asia, Latin America and Europe, which is positive as it diversifies away from the dollar currency.

Some of the most successful businesses have opened stores outside the U.S. in recent years to profit from stronger currencies and lower competition, thus enabling them to obtain higher profits.

On the other hand, international brands like H&M (Swedish) and Zara (a Spanish company called Inditex) have opened mega-stores in the United States, especially in the East Coast, as well as in emerging markets.

VF (with a forward January 2013 PE of 14 and price book ratio of 3) is not cheap but its strong brands and overseas expansion make it a stock worth having in one’s portfolio for the long term.

If one looks at the valuation paid by VF for Timberland (with a forward 2012 P-E of 17.4 and price to book of 3.31), than one possible candidate for a takeover is American Eagle. It has a January 2013 forward P-E of 12.85 and price to book of 1.99. The added benefit of investing in this company is the cash per share of $3.11, which sharply reduces the forward P-E. Either a major apparel company or private equity could take it over.

Another smaller apparel company with an attractive valuation is Wet Seal (WSLA) with cash per share of $1.81, no debt, forward January 2013 P-E of 17.7 and price to book of 1.89. Aeropostale has a forward January 2013 P-E of 9.50 but high price to book of 4.25 and much less cash per share than the other two companies.

One should not rush and buy large cap apparel shares as most are highly priced and susceptible to high cotton prices. Still, one should monitor well-managed companies with strong brands and an overseas expansion program (like VF) as well as small to midsize cap apparel companies that have a potential either to be taken private or taken over by larger competitors.

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During the summer months, the volume of shares traded tends to decrease as Wall Street executives and traders head for the Hamptons and retail investors go on vacation. In Europe, many businesses close down for the whole month of August, especially in countries like...
Tuesday, 12 July 2011 07:57 AM
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