The teen retail industry is in play after Wunderlich initiated coverage on Urban Outfitters (NASDAQ: URBN) and Abercrombie & Fitch (NYSE: ANF) at Buy, coupled with Aeropostale (NYSE: ARO) and American Eagle (NYSE: AEO) at Hold.
Teen retailers listed above have underperformed the market by 33.7 percent over the past year versus a 14.7 percent gain on the S&P 500.
Analyst Eric Beder showed his support by commenting, “We believe the segment is among the cleanest in the mall and, if the fashion is right, has the ability to drive materially higher returns.”
Although Beder sees upside in the group, the pathway there will be choppy.
The research report implies Urban Outfitters is in the best position of the group, as long-term viability is less of a concern.
Urban Outfitters has the “deepest on-line penetration of any teen player (by far), as the only long-term investment in the group. We believe, after a tough period, that the Urban Outfitters chain is nearing an inflection point that will drive the company back to prominence and a premium valuation.”
Abercrombie & Fitch
Abercrombie may have a choppy road ahead of it, but the retailer may have the ability to take over as the leading retailer. Beder explains, “We believe, after a tough period, that the Urban Outfitters chain is nearing an inflection point that will drive the company back to prominence and a premium valuation.”
One of the key concerns Beder raises with American Eagle is that it lacks a permanent management team. The company has been stuck with an interim CEO since January and its remaining leaders are nearing retirement age.
Because a massive turnaround is needed, Wunderlich is staying on the sidelines until a leader to pull the company through emerges.
Regarding Aeropostale’s turnaround, Beder wrote, “management has attempted to shift the mix to a slightly older, more fashion-forward teen customer; while there have been some hits (the Bethany Mota line), it has been very difficult to switch the current customer base in a period of near chaos in the sector.”
Aeropostale recently raised $150 million in financing, which gives the company room to operate in the near term, but the long-term outlook is still foggy.
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