Danger! Danger! Many companies rely on consumers wanting to wear the brand, but as soon as consumer sentiment leaves so do profits. Being caught in a stock who’s product is no longer popular is a bad scenario for investors. Let’s take a look at three businesses that depend on brand name, and I will asses a danger score from 1 to 5 for each — 5 being the worst.
87 is not heading to heaven
Aeropostale, Inc. (NYSE:ARO) used to be the thing to wear, but not so much any more. The standard t-shirt with “Aeropostale 87” on it has disappeared. I guess it isn’t cool to wear Aeropostale, Inc. (NYSE:ARO) anymore, and my hunch is backed by the numbers. Aeropostale’s comparable store sales declined by 14% in the first quarter of fiscal 2013 due to heavy promotional activities and low demand for spring clothing. The retailer seems to be banking on the growth of a different brand, P.S. from Aeropostale, Inc. (NYSE:ARO) to save the flailing business. Unfortunately, a new brand cannot be grown overnight and Aeropostale, Inc. (NYSE:ARO) is in some serious trouble. I am surprised Aeropostale’s price has not sunk more; a current P/E of 104 seems out of sorts. Also, with a paltry ROE of 8.5, management is clearly making mistakes.
Danger Score: 5
This house is protected
The Under Armour Inc (NYSE:UA) brand has remained strong. Even during 2009, Under Armour Inc (NYSE:UA) was able to grow its customer base and earnings; that is saying something with the premium prices it charges for its brand. Under Armour Inc (NYSE:UA) apparel is now on the same level as NIKE, Inc. (NYSE:NKE), perhaps even higher. Another advantage, unlike with Aeropostale, Inc. (NYSE:ARO), is that Under Armour is worn by a variety of consumers; everyone from kids to adults sport the gear. The current P/E of 55 looks very high at first, but Under Armour has increased year-over-year revenue by at least 20% each quarter for the past three years. Under Armour Inc (NYSE:UA)‘s fantastic profit margin is not in danger as consumers will continue to pay a premium for the brand they desire. Under Armour Inc (NYSE:UA) practically doubles Aeropostale’s ROE, coming in at 16.2. CEO Kevin Plank recently stated sales are expected to double by 2016 — $1.8 billion to $4 billion — and there isn’t much reason to be a doubter.
Danger Score: 1
Growth flying away?
American Eagle Outfitters (NYSE:AEO) has had a tough time growing its business lately, with a lackluster projection of 4% EPS growth in 2013. The big question is, will this pick up? American Eagle Outfitters (NYSE:AEO) definitely believes so, predicting a 16% growth rate in 2014. The stock also looks attractive with a 2.5% yield, 16 P/E, and not debt — what’s not to like? When taking a closer look, investors can find an ugly payout ratio of 178. Unfortunately American Eagle Outfitters (NYSE:AEO) is currently paying out more to shareholders than it makes. Personally I wear American Eagle Outfitters (NYSE:AEO) products, along with my peers; it is seen as an acceptable brand for teenagers, but rarely do you find someone else wearing its products. With sales at stores open at least a year falling 5% in the first quarter of 2013, time will tell if projected growth will come through.
Danger Score: 3
When a company relies solely on one specific group it is a risk to invest, especially for the fickle and crowded teen market. But when something does catch on, heads up because everyone has got to have it. Just like stocks, no one knows for sure what is going to happen. All you can do is take your best guess — backed with some evidence — and go for it.
Grant Hosticka has no position in any stocks mentioned. The Motley Fool recommends Under Armour. The Motley Fool owns shares of Under Armour.
The article Going Out of Style? originally appeared on Fool.com and is written by Grant Hosticka.
Grant is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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