Aeropostale believes its sweet spotrevolves around teens between the ages of 14 and 17. The company has been making key changes to add diversity to its apparel mix. What this entails is focusing on higher average unit-revenue items. The high average unit-revenue fashion segment currently accounts for around 25% of its revenue. These items include the likes of shoes and outerwear.
Management
And management? It appears to be competent for Aeropostale. Glassdoor, the workplace review site, has Aeropostale CEO Thomas Johnson’s approval rating at 86%, while Abercrombie’s CEO is at 36% and American Eagle’s CEO is at 86%. Johnson has been at Aeropostale for almost a decade. Part of the reason Mike Jeffries’, Abercrombie & Fitch Co. (NYSE:ANF) CEO, rating is so low is that he is no stranger to controversy, purposely limiting the size (no XLs) of the clothes in his store to be sure to attract “good looking” people.
Valuation
Historically, the three A-retailers have all traded in line on a P/S basis, but you will notice a vast divergence that began in late 2010. Today, Aeropostale trades at less than 0.2 times revenue.
This marks one of the lowest points the stock has traded from a P/S basis over the last decade. Since 2002, Aeropostale’s average price-to-sales multiple has been 1.1 times.
The holiday season could be a game changer for teen retailers, assuming they can manage to bring to market new products to get customers back into stores. Valuations have been compressed to the point where the slightest sign of a turnaround could propel the stock.
While I think, Aeropostale presents the best opportunity from a valuation perspective, Abercrombie & Fitch Co. (NYSE:ANF) has four key brands, which, in part, allows it to operate across a broader part of the retail spectrum. Its key brands include Abercrombie & Fitch, Abercrombie kids, Hollister, and Gilly Hicks. As a result, the retailer has held up much better than its two peers.
While Aeropostale, Inc. (NYSE:ARO) is turning to its apparel mix to improve operations, Abercrombie & Fitch Co. (NYSE:ANF) has international plans, looking to expand in Europe and Asia. Flagship Abercrombie & Fitch stores will be opened in Seoul and Shanghai this year.
Bottom line
One of the reasons I like Aeropostale is that it has no debt and over $100 million in cash ; that means cash covers 15% of its market cap. With a slight turnaround in margins, I believe there could be impressive upside. That’s not to say that both American Eagle Outfitters (NYSE:AEO) and Abercrombie won’t reward shareholders, but I think Aeropostale is the one to own.
The article Investing in Apparel Requires a Level Head originally appeared on Fool.com and is written by Marshall Hargrave.
Marshall Hargrave has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.
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