That the weatherman is important for making business decisions was never more evident than in March, the coldest since 1996 and the snowiest since 2002. Unpredictable weather can prove to be expensive for businesses as it affects consumer demand. Planalytics, a source of Business weather intelligence, provides actionable information that companies need for making decisions like when to stock heavy woolens and when to order spring goods and light apparel. By the evaluation of the company, demand for shorts and sandals in March was down 12% and 9% respectively.
For several years now, warm weather in March has been rewarding the retail apparel sector but this time around it is facing problems in selling spring items due to exceptionally cold weather. This is likely to lead to high unsold inventories and smaller margins. Already, Children's Place Retail Stores (PLCE) has scaled down its first-quarter guidance, blaming the weather.
Children's Place Retail Stores, Inc
Children's Place is specialty retailer of accessories and apparel for children from newborns to 10-year olds. The company designs, outsources production and sells its products under the Children's Place brand in North America. As of February 2, 2013, the company had 1,095 stores and an e-store, childrensplace.com. The company also sells in international markets through franchises.
In its Q4 FY 2013, the company reported an increase of almost 6% in net sales and a 5% increase in gross profit over prior year despite an increase (5.6%) in the cost of sales. Earnings per share from continuing operations were $2.61 for the full year. Quarterly EPS for the fourth quarter was $1.15 beating analyst estimates by 12 cents.
Children's Place joined the chorus with other retailers in blaming the weather and cut earnings expectations for the next quarter. Analysts were earlier expecting an average EPS of $1.20 per share but the company lowered guidance to within a range of $0.60 to $0.65. However, the forecast for FY 2014 is 20% higher at $3.14 per share.
The company has a strong balance sheet with a book value of $25.69 per share. It is a debt free company with operating cash flow of $205 million and leveraged cash flow of $$100.70 million.
Children's Place is taking positive initiatives for expanding its revenue base. The company is exploring the wholesale space and soon its products will be tested at WalMart's Sam's Club. The company's initiatives in increasing e-commerce capabilities are expected to increase online sales from 11% to 15% of sales.
American Eagle Outfitters (AEO)
American Eagle is an apparel retailer with a family of brands, American Eagle for 15- to 25-year old men and women, aerie brand for intimates and personal care products for women and 77kids for younger children. As of February 2, 2013, the company operated 893 American Eagle stores and 151 aerie and 46 77kids standalone stores. It also has 49 franchises in 13 countries.
Unlike Children's Place, which does not pay dividends, American Eagle is a dividend-paying company with a history of dividend payouts since 2006. At the current market price of $18.70, the company's dividend yield is 2.35%. Like Children's Place, American Eagle also does not have any public debt.
The company reported revenue of 3.48 billion for the fiscal year ended February 1, 2013, a growth of 11.54% over the prior year. Net income however increased by almost 53%. However, EPS for the fourth quarter was on expected lines at $0.55. Keeping in line with reports of poor sales in March this year, analysts forecast a much lower EPS of $0.18 for the first quarter of calendar year 2013.
Abercrombie & Fitch Co. (ANF)
Abercrombie & Fitch Co., a mid-cap retailer in the sector that may be compared operates through its subsidiaries as a specialty retailer. As of February 29, 2012, the company operated 1,045 stores that sell products under Abercrombie & Fitch, abercrombie kids, and Hollister brands. More than one hundred years old, the company's headquarters is in New Albany, Ohio.
Although not totally debt free like Children's Place and American Eagle, Abercrombie & Fitch has a very low debt-to-equity ratio of 0.04. The company reported an EPS of $2.21 for the quarter ended January 2013, beating analyst estimates by 28 cents. However, analysts forecast a negative EPS ($0.04) for the fiscal quarter ending April 2013. At current market price, the company provides a dividend yield of 1.72%.
Weather forecasts for businesses are good for making inventory and purchase decisions. Most businesses do rely on companies providing business intelligence on various aspects. Power utility companies, for example, depend on weather forecasts to avoid last minute megawatt purchases as they can be pretty expensive.
However, utility companies are local businesses with the same weather all through their operational area. Weather is not the same across the country. California, for example, is already enjoying warm weather and the apparel retailers discussed above are spread across the country, even overseas.
Fluctuations in quarterly revenue, income and EPS are expected because of the cyclical nature of the retail apparel industry. Instead of weather, what is more important for apparel retailers is to keep constant track of latest trends, consumer preferences and demand. For example, the burgeoning trend of recent times has been incorporation of organic and sustainable materials. The three companies reviewed above have strong fundamentals with the potential of steady growth. These are well established businesses with fingers on the pulse of the market.
The current technical parameters however suggest overvaluation. Both American Eagle and Abercrombie have price-to-earnings ratios above 14, while Children's Place is trading at a P/E of above 17. That should not be an issue as the apparel retail stocks trade at high PE multiples of above 17.
Still, all three are trading below their 52-week highs. I would keep these on my radar and buy at every minor dip to accumulate for the long haul.
Note: All financial data sourced from Yahoo Finance and Nasdaq.