Will Investors Rue the Loss of rue21, inc. (RUE)?

Let’s face it, the company had a bad quarter, but as with many retailers, seasonality comes into play. Operating cash flow was negative, but has been negative in past years during this quarter. Days in inventory is trending down year over year, which is good news, and inventory levels are also lighter than in previous years both in terms of value and as a percentage of revenue. Receivables and payables are both well managed. The stock has begun to move up since mid-April, consistent with past seasonal trends. Expect another quarter of wing-flapping, then a take-off to greater heights.

Abercrombie & Fitch
On Friday, May 24, the company reported fiscal-year first quarter earnings of negative $0.09 a share and a net loss of $7.2 million. CEO Mike Jeffries noted that although the negative earnings number reflected a $0.16 improvement over last year, the results were caused by “significant inventory shortage issues.” He added that with the inventory headwinds behind them, he expected to see continued sequential improvement in the second quarter.

Nonetheless, the Street punished this retailer and the stock dropped 8.5%. The MF EQ database ranks A&F a B” but the rating has oscillated between B and A for several weeks. While it is true that lower inventory can translate into lower sales (not enough merchandise to sell), generally the opposite is true — lower inventory should indicate higher revenue. In this case, however, sales were lower sequentially and year over year. A&F claimed improvement to its gross margin of 720 basis points, meaning the cost of goods sold was lower as a percentage of revenue. Inventory is the largest component of COGS. So, it appears that sales were sacrificed to improve the gross margin and earnings numbers. Tricky! Who buys clothes for the summary, anyway? Also, keep in mind that this quarter as well as the next are seasonally slow periods, so this could be an opportunity to put a toe into the water before the back-to-school and Christmas selling seasons kick in.

Summary
Retailers are a good way to judge the state of the economy, but seasonality affects trading decisions. Patience is a key virtue here. As always, Foolish readers should base investment decisions on earnings quality.

The article Will Investors Rue the Loss of Rue21? originally appeared on Fool.com.

Fool contributor John Del Vecchio is manager of the Forensic Accounting ETF. He is the co-author with The Motley Fool’s Tom Jacobs of What’s Behind the Numbers? How to Expose Financial Chicanery and Avoid Huge Losses in Your Portfolio. He has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.

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