Guess?, Inc. (GES), Aeropostale, Inc. (ARO), Urban Outfitters, Inc. (URBN): 3 Apparel Retailers to Watch

Although apparel sales have outperformed many other retailing segments over the past year, the sluggish economic recovery and the rise on the payroll tax in the U.S. have hurt consumers’ discretionary spending power and, therefore, the industry’s profits. Below, you will find three companies, Guess?, Inc. (NYSE:GES), Aeropostale, Inc. (NYSE:ARO), and Urban Outfitters, Inc. (NASDAQ:URBN), that a worth a look even in such an economic environment.

A company with a renewed outlook

Urban Outfitters, Inc. (NASDAQ:URBN) had undergone a rough period after 2009. However, its latest results and renewed management make me believe that a recovery is feasible and make the firm worth a closer look. Years of experience in the specialty retail segment have provided the company not only with a strong brand name, but also with the necessary knowledge to create unique shopping environments that induce customers to remain longer inside the shops looking for deals, bargains, and value.

Urban Outfitters, Inc. (NASDAQ:URBN) has fewer than 500 stores. This provides plenty of expansion opportunities, in the U.S. as well as in overseas markets, for years to come. As management has proven prudent in its expansion plans — seeking to multiply in under-penetrated markets in order to attain higher revenue per square foot — its less than 100 openings between 2013 and 2014 carry plenty of upside potential. Looking forward, new store openings should drive growth.

Furthermore, profit should be driven in the long-term by other initiatives apart from the store base expansion, including productivity and merchandising improvements, technological advances, and growing wholesale revenue. As a result, Urban Outfitters, Inc. (NASDAQ:URBN) is expected to deliver a 15.4% average annual consensus growth rate for the next five years. Meanwhile, a renewed product offering and its multiple brands, which create opportunities for flexible merchandising strategies, should boost revenue in the near-term.

Just like every other apparel business, the company faces the risk of not getting the fashion right. However, offering:

1). better growth prospects and wider net (8.5%) and operating (13.4%) margins than most of its peers
2). substantial pricing power and a loyal customer base
3). a debt free and cash filled balance sheet

I’d recommend buying this stock before it gets more expensive.

Not only a teenage brand

Aeropostale, Inc. (NYSE:ARO) operates both a popular retail segment for young people and a wholesale apparel business. However, its retail section contributes roughly 95% of the firm’s total revenue, so my focus will be on it. Although many believe that Aeropostale, Inc. (NYSE:ARO) is a brand targeted at teens, the company also holds the P.S. brand, which is aimed at mature audiences and has created some kind of brand loyalty over time.

Nevertheless, switching is always a risk factor one should take into account when investing in the apparel industry. Volatility in input expenses, especially in cotton prices and Chinese labor costs, is another important concern among stockholders. Furthermore, recent missteps in the merchandising area have strongly hit margins and comps and getting the fashion right remains a sizable challenge. Given this situation, the company’s lack of a moat and its above average valuation at 34.4 times its earnings, versus the 20.2x industry average, I’d recommend a hold on this stock for now.