5 Clothing Companies Trading Near 10PE

TK All-Star posted on 07/18/12 at 09:46 AM

Alan Brochstein looks at retailers with low valuations and below-average margins
Could it be Christmas in July? Perhaps, if you are interested in buying the stocks of companies that sell clothing. Gasoline prices are falling, but retail sales have been weak now for three months, with the most recent report (for June) suggesting modest declines over the past few months and slowing, but positive, growth compared to a year ago. Some suggest that the pause is payback for weather-related strength during the winter. While this is probably the case to some degree, I think it’s also true that the consumer has been a bit tight-fisted amidst economic and political uncertainty.

Just like the weather, though, consumer sentiment shifts around. Right now, pessimism seems to reign, both for the consumer as well as many consumer stocks. A small shift in sentiment could help on both fronts. If, like me, you expect that consumer spending could accelerate in the second half of this year, it might make sense to look at companies that sell clothing. Not only have soft sales been a concern, but also high input costs, including cotton and transportation costs, have hurt near-term results.

I set up a screen to identify stocks for which it might make sense to study further. It’s quite easy to come up with a list of companies trading at a low valuation, but I wanted to go a bit further. First, I wanted to make sure that the stocks weren’t in fundamental free-fall, meaning that their operating income is plunging and not expected to recover. Second, I wanted to make sure that the valuation wasn’t off of inflated margins. In other words, is the company’s profitability so high that it’s not sustainable? If that is the case, one needs to be careful regarding the valuation, as falling margins could hurt future earnings, perhaps leading to a decline. Here are the details of the screen I ran using Baseline:

  • Market Cap > $500mm
  • Forward PE < 10.25
  • Net Margin vs. 5-year Average < 1
  • Trailing Sales Growth > 0%
  • 2013 EPS Growth > 0%
  • 2012 Earnings Estimates Revisions < -5%

So, these are stocks with relatively low PE ratios based on margins that are at or below the average over the past five years. Also, each is growing sales and is expected to grow EPS next year. Finally, the EPS estimates for this year aren’t declining rapidly.   Here are the 5 names that made the cut, sorted by PE:

Please remember that these are not recommendations. You should always do a thorough investigation of any company before investing in it.

I have included several data items to help refine the list further. Several of the companies have less debt than cash and investments, and I have highlighted them in green. I have also included the YTD and 1-Year price returns:  All of the stocks are lagging the market over both time-frames.

As you can see in the table, all of these stocks are currently projected to grow earnings by 10% or more in 2013. Clearly, though, as is indicated in the last column, which is the short-interest ratio, many investors don’t seem to agree with the analyst estimates.

Iconix Brand (ICON) licenses a portfolio of brands (including Candie’s, Joe Boxer, Ocean Pacific, Danskin and more). Most recently, it added Zoo York and Sharper Image last year.  Wal-Mart is the biggest licensor, representing 17% of sales in 2011, with Target, Kohl’s and K-Mart each above 5%. The company reduced guidance after Q1, citing weakness in three men’s brands. Insiders own almost 5%. The stock, which has been in a powerful uptrend since bottoming in late 2008 near 5, peaked last summer near 26 and seems to be consolidating after trading as low as 14.

Abercrombie & Fitch (ANF) really stands out to me. Over time, its fortunes seem to ebb and flow, as it, along with rivals American Eagle (AEO) and Aeropostale (ARO) battle it out for the teen customer. AEO and ARO are up big this year, while ANF is down big. I happen to like AEO’s management team more than this one, but the valuation difference is compelling, as AEO trades at 16PE. ANF has been expanding rapidly in international markets, a move that has concerned investors. Insiders own almost 4%. ANF bottomed near 14 in late 2008 and trade as high as 78 before declining sharply since October.

Kohl’s (KSS), which sells moderately-priced clothing and housewares in its free-standing department stores, started the year great but has pulled back since February as sales have been soft. So far in 2012, overall sales are flat while same-store-sales have declined slightly following a very weak June. This one looks very inexpensive to me, trading at 60% of the median PE over the past decade. Insiders own almost 9%. After recovering with the market in early 2009, the stock has been trading sideways for the past three years.

Guess? (GES) is likely suffering from its high European exposure. The stock is even cheaper than it appears, as it has about $5.50 per share in cash net of debt. Insiders own almost 29% of the company. The stock rallied from a low near 10 in 2008 to a high above 51 (twice) in 2010 and has corrected almost 2/3 of that move at the recent low near 24.

Deckers Outdoor (DECK), which sells both the wildly popular Uggs as well as Teva and Sanuk sandals, had a tough winter due to the warm weather. This is one I thought was too expensive before. Perhaps now, after a powerful correction, it is priced more appropriately, especially taking into account cash per share in excess of $5. While its margins are down, they are still somewhat high for a shoe company, and the company remains very reliant upon Uggs. Insiders own almost 3%. The stock peaked at 119 last Halloween, and it’s been all tricks and no treats since then. The stock has bounced off of levels that served as support in the summer of 2010, also suffering a decline of almost 2/3.

Screening is a tool to identify stocks to study more closely for potential investment. In this case, we have looked at 5 clothing stocks that might “dress up” your portfolio with their seemingly affordable valuations. As I have said in the past, retail is a part of the market where being contrarian can prove rewarding. Each of these five stocks seems to fall into the contrarian category.

Alan Brochstein
Founder, Invest By Model and AB Analytical Services
TradeKing All-Star Commentator

Disclosure:  No positions held in any positions mentioned.

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Posted by TK All-Star on 07/18/12 at 09:46 AM


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