Ranking the Dividends of the 'Teenage' Retailers

Includes: AEO, ANF, FL, GES, GPS, LB
by: Jefferson Starship

By this point it is well known that the American teenage unemployment rate is at a drastically high level. At the start of the last few summers (starting here and more recently) we have been made aware of the fact that 25% of teenagers cannot find jobs. This is going to date me, but the classic protocol was: get out of school, work through July and August, somehow spend all of those earnings by October, thus necessitating further employment, and find said further employment. With this process now being much more difficult to perform, (and assuming that those who are working are not being paid as much) we are left to ask how are they spending the money they do have and can retailers who sell teenage apparel sustain their relatively decent dividend yields.

In the first holiday season once the recession had started, there was a significant drop in the cost of consumer goods, especially items found in shopping malls. This helped these stores clear excess inventory, move merchandise, and still make a profit. But prices have since rebounded while unemployment and wages remain constant. Elementary economics would therefore tell us that the increased mark-ups must therefore be covering the reduced sales figures.

This has certainly been the case for some companies, who have been able to adapt, while others have had a rough year. The list below ranks these teenage retailers by their dividend yield. It was derived from a Yahoo scan for apparel stores with a market cap of at least $1 billion and a yield of 2%; and Abercrombie was tacked on the end because it should be included.

American Eagle Outfitters (NYSE:AEO) –
American Eagle is probably one of the top two teenage retailers out there in terms of market presence. They do not report earnings until late August and they are hoping to rebound from a poor report in the first quarter. They are currently yielding 3.2% at their price of $14, down from a one year high of $17. However, the dividend has been increased in the last 12 months, including a special dividend of 50 cents per share, and there is a chance that it will be increasing for next quarter. The major negative is their relatively high P/E at 17, but the future growth chances are probably priced in here a bit more heavily than at their competitors. It should also be noted that their dividend was frozen during the recession.

Foot Locker (NYSE:FL) – Foot Locker has been on a bit of a run (get it?) this past year, basically doubling from $12 to $24. This accounts for their high P/E which, at 17, is in line with American Eagle’s. They have a pretty strong stranglehold on athletic shoe sales in malls (they own Champs, too) and have been able to deal with the increase in online dealers over the years. Their earnings are going to be released in mid-August and if the past year is any indication, they are going to blow away the estimates. They have a yield of 2.8% that will accompany this growth in earnings, but the dividends were frozen during the recession.

The Gap (NYSE:GPS) – This is probably the least ‘teen’ on this list as their clientele has a much wider age range. They have had a very choppy 12 months and are now sitting at $19, down 17% over the last two months. They do however have the lowest P/E on the list, at 10, which I would think is a sign of a lack of faith rather than safety. Conversely, they have increased their dividend twice since 2009 and are dishing out 2% now.

Guess? (NYSE:GES) – Guess has also had a very tough year, falling over 20% from highs over $50 to $39.53 now. In my personal opinion I think that this company has the most to gain if and when the economy improves, based on their products, pricing, and target market. They are slightly higher end than others on this list and consumers today may be less willing to spend on basically comparable products. They have only been paying a dividend since 2007 and it has been growing at a rapid pace. It yields 2% against their current P/E of 13 with earnings to be announced in late August. They haven’t missed on earnings in recent history and perhaps this will help spur some price appreciation.

Limited Brands (LTD) – Limited might as well be called 'Victoria’s Secret et al'. It is the largest stock on this list and also derives a greater majority of sales from the holiday season than all the others. It has been a growth story over the last year, $24 to $42, and now at $39, and still yields 2%. They have a moderate P/E of 15 and a history of big special dividends ($3 and $1 in the last 16 months). They are probably the strongest company on this list and will look to beat earnings again in mid-August.

Abercrombie & Fitch (NYSE:ANF) – Abercrombie did not show up on the screen because of their low dividend yield, 0.9% and not increasing, but they have rebounded to pre-recession levels. They are much more a growth story than they are a dividend yielder, and have done so with very strong branding. I will refrain from offering my opinion on their clothing, but with their subsidiary, Hollister, they have put a lock on whatever you would call that style. They did have that bed bug scare about a year ago but it wasn’t much of a deterrent.

Again, this list is based on yield and not in order of my preference.. I do not currently own any of them, but if I had to pick I would go first with Limited’s growth potential and then American Eagle for the combination of growth and yield. I think Guess may be the riskiest, but if the market decides to recover before Thanksgiving they could offer the greatest price appreciation in the short term.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.