The teen retail space is one that initially appears lucrative, but is actually fraught with risks.
Although teen shoppers are some of the most active shoppers in the world, they are also the most fickle. What might be cool one moment might be dated the next. Therefore, teen retailers need to constantly keep in touch with the constantly shifting opinions of teens, via social media and market studies. There are retailers that have failed miserably, such as Abercrombie & Fitch Co. (NYSE:ANF) and Aeropostale. Others, such as Urban Outfitters, have stayed in touch with teen demand with kitsch and unique items, and reaped the benefits.
However, there are three companies under the radar which think investors should also pay attention to – Five Below Inc (NASDAQ:FIVE), The Wet Seal, Inc. (NASDAQ:WTSL) and The Buckle, Inc. (NYSE:BKE). All three companies have performed incredibly over the past year, outperforming the market by a wide margin.
Five Below
Five Below Inc (NASDAQ:FIVE) is a relative newcomer to the sector, making its public debut last July with an IPO price of $17. Shares have more than doubled since then. The company first opened in 2002, selling a huge assortment of female teen-centered products, such as party supplies, cheap iPhone cases, nail polish, jewelry, accessories, sunglasses and humorous printed T-shirts. It also sells room furnishings, such as glitter lamps, posters, fleece blankets and incense. The appeal of Five Below Inc (NASDAQ:FIVE) is its price range – all of its products are priced between $1 to $5, making them easily affordable for its target demographic.
That simple, efficient business model earned the company $0.05 per share last quarter, a penny above the consensus estimate. Revenue rose 33.1% year-on-year to $95.6 million, topping the $94.23 million that analysts had expected. Same-store sales rose 4.2%.
Although Five Below Inc (NASDAQ:FIVE) has a tiny footprint of 258 stores, the company added 14 new stores during the first quarter and intends to add 60 more locations during the year, concentrating heavily on the Dallas and Austin areas in Texas. I believe that Five Below Inc (NASDAQ:FIVE) has room to grow due to its pricing strategy and wide assortment of products. Five Below Inc (NASDAQ:FIVE)’s constant rotation of lower-priced products to keep things fresh is a tactic that has worked well for teen apparel retailers Forever 21 and H&M.
Wet Seal
In a previous article, I mentioned that teen apparel retailer The Wet Seal, Inc. (NASDAQ:WTSL) was a hidden gem, since its growth potential isn’t immediately apparent by looking at its traditional growth metrics. Last quarter, The Wet Seal, Inc. (NASDAQ:WTSL)’s adjusted earnings fell to a penny per share, down from 2 cents in the prior year quarter. Its revenue fell 5.1% to $140.4 million as its same-store sales declined 3.4% and 0.9% at its Wet Seal and Arden B stores, respectively. The company currently operates 464 Wet Seal locations, which caters to juniors, and 62 Arden B stores, which offers more contemporary, feminine apparel for slightly older customers.
The bright side of The Wet Seal, Inc. (NASDAQ:WTSL)’s quarterly earnings is its same-store sales decline of 2.9%, which was a dramatic improvement over the 7.7% decline it reported a year earlier. E-commerce sales also rose 6.8% to $6.5 million, accounting for 4.6% of the company’s top line. Operating income also increased to $3.2 million, a big improvement over the operating loss of $0.4 million a year earlier.
More important, after facing tremendous pressure from activist investor Clinton Group, which owns 6.9% of the company, The Wet Seal, Inc. (NASDAQ:WTSL) reshuffled its management team on multiple levels earlier this year. Most important, the board appointed John D. Goodman, a former Gap Inc. and Levi Strauss & Co. executive, to the CEO post. It also appointed former Bebe Stores executive Tamara Chamberlain as the President of Arden B. The company’s first quarter results indicate that this reorganization has been having the desired effect on turning around its lagging top and bottom line growth.
The Buckle Inc.
The Buckle, Inc. (NYSE:BKE), which was founded in 1948 and went public in 1992, is another name that is often overlooked by investors in teen retail. The company was once a men’s clothing store, which evolved into a denim-based store, which later started offering women’s apparel as well. Today, The Buckle, Inc. (NYSE:BKE) offers apparel for kids, juniors and adults.
Last quarter, The Buckle, Inc. (NYSE:BKE) earned $0.78 per share, or $37.6 million, down slightly from the $0.79 per share, or $37.8 million, it reported in the prior year quarter. Revenue rose 2.3% to $269.7 million as same-store sales climbed 1.2%. Online sales rose 6% to $20.9 million.
Although these numbers are not particularly impressive compared to the rest of the retail apparel industry, its growth over the past five years is quite impressive when compared to similarly diversified retailers, such as American Eagle Outfitters.
Therefore, The Buckle, Inc. (NYSE:BKE) has an advantage over many of its industry peers – slow and steady growth in a highly macro-dependent sector.
The Foolish Bottom Line
Five Below Inc (NASDAQ:FIVE), The Wet Seal, Inc. (NASDAQ:WTSL) and Buckle offer three different approaches to the teen and young adult market, and each business has its own merits. In closing, let’s compare the fundamentals of these three companies to gauge which is the better investment at current prices.
5-year PEG | Forward P/E | Price to Sales (ttm) | Return on Equity (ttm) | Debt to Equity | Profit Margin | Dividend Yield | |
Five Below | 1.74 | 41.22 | 4.63 | 100.59% | 45.91 | 5.14% | No div. |
Wet Seal | 1.15 | 21.65 | 0.77 | -59.36% | No debt | -19.17% | No div. |
Buckle Inc. | 2.44 | 15.16 | 2.36 | 45.68% | No debt | 14.52% | 1.5% |
Advantage | Wet Seal | Buckle | Wet Seal | Five Below | Wet Seal, Buckle | Buckle | Buckle |
Source: Yahoo Finance, 7/12/2013
For investors who like exciting, speculative growth stocks, Five Below Inc (NASDAQ:FIVE) looks like a solid bet. Meanwhile, The Wet Seal, Inc. (NASDAQ:WTSL) should appeal to investors who like a good turnaround story. Last but not least, The Buckle, Inc. (NYSE:BKE) is a rarity in the apparel sector – a slow but stable stock which has double digit margins and a decent dividend. Therefore, I believe that these three companies are hidden gems in the retail sector which shouldn’t be overlooked.
The article Three Hidden Gems in Teen Retail originally appeared on Fool.com and is written by Leo Sun.
Leo Sun has no position in any stocks mentioned. The Motley Fool recommends The Buckle. The Motley Fool owns shares of The Buckle. Leo 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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