The economic recovery in the United States has helped people achieve solid profits on their equity investments since 2009. Even though the financial meltdown is now part of our history lessons, it is not uncommon to find people who still perceive the current market condition as a bubble ready to burst. I am not one of the pessimists, and I believe that the market still has potential going forward, but it doesn’t really hurt to take a cautionary approach to investing.
Online is the new trend
With a focus towards teenagers and young adults, American Eagle Outfitters (NYSE:AEO) is my first choice from the apparel industry. The company’s retail outlets are present in 16 countries worldwide, whereas its e-commerce operations help it to sell products to customers in 81 countries.
The company’s e-commerce operations helped it grow revenues more than 25% in 2012. American Eagle Outfitters (NYSE:AEO) has great potential going forward; it has the ability to stay on top of any changes in contemporary fashion, and has strong customer engagement. The company has a disciplined inventory control system, as it employs the Just-In-Time strategy to manage inventories. This makes the company avoid surplus inventory situations, therefore leading to lesser chances of the company offering discounts or markdowns.
Another great thing about this company is its focus on international expansion. The company recently acquired its six franchise stores in China and opened a new one in Mexico. In the Philippines, the company has given a go-ahead to its first franchise store. I believe the company is on the right path with great potential for growth in the coming years.
Loyal customers for this apparel manufacturer
Abercrombie & Fitch Co. (NYSE:ANF) has three segments: U.S. stores, International stores and Direct-to-Consumer, through which it targets men, women and kids. The major portion (almost 42.4%) of revenues comes from internet & catalog orders. Other sources of revenues include the company’s brand stores, Hollister stores, and the Gilly Hicks & Abercrombie & Fitch Co. (NYSE:ANF) kids stores.
The company’s 1Q13 results were a shocker, as the company’s revenues went down by almost 42% on the QoQ basis. This was the result of an unexpected shortage of inventory rather than a decrease in demand for the company’s widely popular clothes. Abercrombie & Fitch Co. (NYSE:ANF) is very confident that its business model has the potential to achieve growth in the coming years and such glitches in its inventory systems will only help it to debug and solidify its systems.
Abercrombie & Fitch Co. (NYSE:ANF) has a very loyal following among its customers, which it can rely on for its revenues. Its brand image has high recall and is very recognizable among specific young age groups. This is the reason why the company is able to sell its highly priced products, even though economic conditions are not right for such a strategy. As a large percentage of the company’s sales are already through its online portal, I expect it to perform well in the coming years.
Ascena’s downturn
Ascena Retail Group Inc (NASDAQ:ASNA) is my last pick from the apparel industry. The company targets women and teen girls with brands such as Justice, Lane Bryant, and Dressbarn. Last year, the company acquired Charming Shoppes, the parent company of the Lane Bryant and Catherine’s brands. This acquisition was supposed to broaden its customer base and increase revenues. The financial results of the company told the opposite story as earnings fell after the acquisitions.
The company’s Lane Bryant and Dressbarn brands reported a YoY decrease in sales of 6% and 7% respectively. This might be due to the fact that, from a holistic point of view, middle-income customers seem to be suffering on the back of a slow economic recovery. A positive point for the company is that it can benefit from its focus on fashionable plus-size clothing for women. At the moment, the company seems to be faced with one trouble after another. I would wait for it to come out of these troubles if I were to invest in it.
Conclusion
The U.S. apparel industry is dynamic and growing. I believe that direct to customer business will remain the main revenue generating mechanism for apparel stores in the years to come. However, retailers will also benefit by upping their international expansion and better customer engagement. American Eagle Outfitters (NYSE:AEO) seems to be best deal out of the trio, as it has yet to realize its potential from a greater focus on online sales.
The article Make Fashion a Part of Your Portfolio originally appeared on Fool.com and is written by Awais Iqbal.
Awais Iqbal has no position in any stocks mentioned. The Motley Fool recommends Ascena Retail Group. Awais 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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