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With the back to school season starting to ramp up over the next few weeks, I thought it would be the perfect time to take a look at a few of the top teenage retailers. I've completed a side-by-side comparables analysis looking at the relevant metrics for American Eagle (NYSE:AEO), Abercrombie & Fitch (NYSE:ANF), The GAP (NYSE:GPS), and Decker's Outdoor (NYSE:DECK). The first three companies compete in the casual apparel space, primarily targeting the teenage and young adult demographic. While Decker's may not be a true comparable due to the fact that it sells a large portion of its apparel through partner retailers, its UGG boots product comprises the lion share of its sales, a popular product among teenage girls.

See my full spreadsheet here.

Growth Metrics:

The below table compares the compound annual growth rate for the sales of each respective company from 2010 through 2012 and the 2012 vs. 2011 sales growth rate:

Company

'10A-'12A Sales CAGR

2012A YoY Sales Growth

American Eagle

8.6%

11.4%

A&F

14.0%

8.5%

GAP

3.3%

7.6%

Decker's

18.9%

2.7%

American Eagle had the best growth rate this year vs. last, generating strong results in its top line. Ambercromie has been delivering strong sales growth since 2010. Decker's has had the strongest growth since 2010, but this is somewhat misleading because it is a smaller company and so are growing off of a much smaller base. Another important insight here is that other than The GAP, no company had a down year in revenue since 2010.

Winner: American Eagle and Abercrombie

Margin Analysis:

Company

'12A GP Margin

'12A EBITDA Margin

American Eagle

40.0%

15.0%

A&F

62.4%

12.2%

GAP

39.4%

15.5%

Decker's

44.7%

15.6%

One of the most attractive aspects of the apparel space is the high margins, which exist even in the face of high competition and medium barriers to entry at best. Brand will always be important in the fashion industry. Decker's wins the margin competition amongst this group, but it could be short lived as its high margins are driven by a monopoly on its famous UGG boots. If the fickle mind of the teenage girl deems UGG boots "un-cool", Decker's will be in for some major pain. It is also interesting that most of these companies have the very similar EBITDA margins.

Winner: All 4 companies have high margins

Free Cash Flow:

Company

FCF as a % of EBITDA ('12A)

American Eagle

84.1%

A&F

74.8%

GAP

63.3%

Decker's

63.4%

This is a metric tells us how much cash each company is converting from the profits it is booking on its income statement. While these numbers are impacted by Capex, which is important for growth, it is still very important to understand how much cash each company is able to generate. American Eagle is far and away the winner here, generating plenty of cash which it is using for dividends and share buybacks. It's not surprising that American Eagle is also paying the highest dividend - it is pumping out the cash to pay for it.

Per Store Performance:

Company

'12A Sales per Sq. Foot

American Eagle

$552

A&F

$485

GAP

$424

Decker's

NA

The performance of each store is an important comparison as it puts each company on an equal playing field. The sales per square foot metric is really an efficiency metric - obviously space costs more money (rent, labor, etc.), so how efficient a retailer is with its space is very important. American Eagle is the most efficient with $552k of sales per square foot. The only caveat here is that one could argue that American Eagle is so well managed that there is very little low hanging fruit to squeeze out more sales from its existing stores.

Winner: American Eagle

Company

'12A EBITDA per Store

American Eagle

$500k

A&F

$525k

GAP

$711k

Decker's

NA

The EBITDA per store metric is relevant because it tells us the profitability by store. I did not look at profit per square foot because I wanted to see how profitable each store as a single, profit generating machine is.

Winner: GAP

Inventory Management:

Company

'12 Inventory Turns

American Eagle

6.3x

A&F

4.0x

GAP

5.4x

Decker's

2.6x

In the retail business, managing inventory is second only to generating sales. Inventory is cash that is tied up - a retailer needs to turn its inventory as quickly as possible. American Eagle wins this category by a long shot. Since inventory is controllable, this is a clear indication of a strong management team. One of the biggest things I look for in any investment is a strong management team - these are the guys we trust our money with.

Winner: American Eagle

Valuation - Enterprise Value / '12A EBITDA:

Company

'12 EBITDA Multiple

American Eagle

5.9x

A&F

6.4x

GAP

8.5x

Decker's

8.6x

So far, American Eagle has fared very well in the above comparables. You might expect that would mean that it is trading for a premium. That is not the case - American Eagle is trading for a big discount to its peers. Of course, the analysis above evaluates past and present metrics which are indicators, but does not look at growth prospects. We need to take a closer look at each company's growth strategy to better understand what a fair multiple for the business should be; however, it appears that American Eagle is cheap!

Conclusion:

From the above analysis, American Eagle appears by and large to be the best managed company, though all of the companies have attractive attributes. Heading into the back to school season, I believe that American Eagle has significant upside yet to be realized by investors.

Source: Which Teen Apparel Retailer Is Best Positioned For Back-To-School?