Thursday, January 31, 2013

These Two Retailers Are Cheap Now

The sales data just released by ShopperTrak indicates that the recent holiday sales, ended Dec. 23, were quite gloomy. ShopperTrak mentioned that traffic fell by 3.3% compared to the same week last year. The significant gain to the previous week of 39.1% was quite reasonable, as the week ended Dec. 23 was the hottest retail season of the year, right before Christmas. However, compared to the same week sales in 2011, retail sales experienced a decline of 2.5%. Right after the data was released, many retailers got hit in the stock market, including The Gap (NYSE: GPS)Aeropostale (NYSE: ARO). However, I think it could be a good chance to pick up these two decent growing retailers to own for the next year.
Gap is one of the leading apparel, accessories, and personal care products retailer in the world, with more than 3,300 stores worldwide operating different famous brands including the Gap, Old Navy, and Banana Republic. Gap has diversified its merchandise with more than 1,000 vendors in 43 countries. In 2011, no vendors accounted for more than 4% of the total company’s purchases. Gap is a seasonal retailer, as its sales reach its peak in around eight weeks during the year end holidays. The company has experienced a decline in its comparable sales in four out of the last five years. However, in November Gap reported positive comp. sales growth. The November comp. sales increased by 3%, quite positive compared to the decline of 5% in the same month last year.
Gap has been a constant cash flow generator in the last 10 years. In the last 12 months, the retailer generated $1.95 billion in operating cash flow and more than $1.35 free cash flow. Since 2004, the retailer has kept delivering double-digit return on invested capital; trailing twelve months, the ROIC was 20.8%. In addition, Gap paid out $0.45 dividend per share, with a payout ratio of 28.8%. Gap is valued at around 6.12x EV/EBITDA. 
Aeropostale is also an apparel and accessories retailer, but it mainly targets young women and men, and also kids from 4-17 years old. The main operations of Aeropostale are in North America, with 1,011 stores in 50 states and Puerto Rico, and 75 stores in Canada. Unlike Gap, Aeropostale has a concentration of suppliers. The retailer sourced around 87% of its merchandise from its top five vendors, with the majority of vendor’s sourcing offices in the US, while production was in Asia and Central America. The business is also seasonal, with the majority of sales and profits derived from the second half of the year, with back-to-school sales season in Q3 and the holiday season in Q4. The retailer experienced positive comparable sales growth in 4 out of the previous 5 years.
Interestingly, Aeropostale ended the third quarter with $184 million in cash and no debt, whereas the total stockholders’ equity was $409 million. The recent $12 million decrease in stockholders’ equity in the previous quarter was due to $40 million share buybacks. In the last 10 years, Aeropostale has experienced consistently positive EPS and free cash flow. During that period, Aeropostale delivered a double-digit return on invested capital. Trailing twelve months, its ROIC was 15.60%. At the current trading price, the retailer is valued at only 4.43x EV/EBITDA, the cheapest among its peers. Whereas Abercrombie & Fitch (NYSE: ANF) is valued at 6.65x EV/EBITDA and American Eagle Outfitters is the most expensive, at 7.1x EV/EBITDA.
My Foolish Take
The cheap EV multiples valuations are quite intriguing for value investors, especially the growing Aeropostale. Even though the market sentiment sent those two stocks down in the short-term, I think those two retailers would be quite beneficial for shareholders in the long run. 

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