They operate with lower margins than ANF but higher turnover. The idea is to be as fast moving and nimble as possible, which is key for this target audience. Earnings are growing at rates of 30% over the last few years.
They sell for P/E=20.2 whereas ANF sells for P/E=17.6. One might ask why would anyone buy ARO when they can buy the more established and safer ANF for a lower price? First of all, ANF is also a great buy at these levels in my opinion. But ARO is actually cheaper. P/CF is 10.2 versus ANF’s 12.3.
A better measure is EV/EBITDA which is in the 8% range for both companies. Because ARO is one third as big, it has more room to grow. Both companies are considerably smaller than The Gap Inc. (NYSE:GPS). Market saturation is well into the future.
The retail environment at this time looks scary. The housing market is collapsing and Americans are getting pushed deeper into debt. A recession is likely, in my opinion, which will probably lead to lower retail sales for everyone. So sell the retailers, right? Wrong. People will still buy clothes, especially lower priced ones. The hardest hit population will be the late 20 and 30 year old crowd. They don’t have teen children anyway. A recession will mean lower real estate prices and more mall store vacancies, which is great for any rapidly expanding and profitable business like ARO which needs to build more stores.
People might dump these two stocks if they get scared enough. That is when we happily pick up more shares at the lower price and giggle like teenage girls. People overestimate the danger in investing in companies that serve the famously fickle teen market. When teens change their minds, they simply need to adapt and change their styling. With good management and fast inventory turnover, they can quickly adapt and go with the flow. These companies have erratic sales and inventory but in the long run remain consistent growers. One reason is that their strategy is fairly simple. Sell clothes that teens want. Take profit and build more stores.
We missed a nice 6% day a few days ago but it is still a bargain in my mind for anyone who can ignore the only people more fickle than teens: wall street investors. Joel Greenblatt has nearly half his money in this company with the other half in Walmart (NYSE:WMT), which is a nice vote of confidence from one of today’s great investors.
ARO vs. ANF 1-yr chart