3 Teen Retail Stocks for Holiday Shoppers

by Jamie Dlugosch | November 14, 2011 1:19 pm

Every year it seems Christmas comes earlier. Retailers dependent on holiday shopping are anxious to jump-start the season with deals that now begin before Thanksgiving — the traditional start of the Christmas season. It’s not surprising given the very difficult economy. Getting out in front can make the difference between a success and disappointment. Just this week Wal-Mart (NYSE:WMT[1]) announced its Black Friday deals[2] hoping to get a leg up on rivals.

Thus far, despite headlines about unemployment and rising prices, retailers have been faring well. Within the larger segment, some teen retailers offer investors compelling value because they’ve been trading lower over the last 12 months in anticipation of a big slowdown that has yet to materialize.

The sector’s demographics help: Teens are ever hopeful, and they like to spend money on clothes. That helps to somewhat insulate teen retailers from such troubles as Europe’s debt crisis. Teens care far more about the latest trends and going to the mall to do some shopping.

And this holiday season is likely to be strong given how well retailers have held up thus far. Investors will want to buy these stocks in advance of year-end earnings results that are likely to be better-than-expected.

So, get your own early start to the holidays with these three teen retailers:

True Religion (NASDAQ:TRLG[3])

One thing certain to be bought during the holidays is blue jeans. This teen staple has evolved to become more and more of a fashion statement. Designer jeans are alive and well, and that should bode well for a company like True Religion.

Note that one of Wal-Mart’s big Black Friday deals is $10 blue jeans. But I wouldn’t be too concerned. As we’ve seen in this economy, there’s a pronounced dichotomy between luxury and discount retailing. So, True Religion’s designer jean sales aren’t likely to slide because of Wal-Mart’s discounts.

On Nov. 2, True Religion announced earnings for the quarter ending Sept. 30 that beat Wall Street estimates. On an adjusted basis, the company made 51 cents per share versus an average estimate of 48 cents. The stock moved higher on the news and is now up 80% over the last 12 months.

For the full year, Wall Street expects True Religion to make $1.19 per share. In the following year, profits are forecast to grow by 18% to $2.33 per share. At current prices, True Religion trades for just 14.5 times next year’s expected earnings.

I would buy the stock in advance of what should be a strong Christmas season for the company.

American Eagle Outfitters (NYSE:AEO[4])

Teen fashion can be fickle. What was popular yesterday can be doomed today. But American Eagle has managed to stay in the forefront of teen trends. Still, the company has seen its stock drift lower in 2011.

American Eagle has matched or bested Wall Street estimates in three of the last four quarters. In the quarter ending July 31 it missed expectations, but by only a penny per share. On Nov. 2 it raised guidance[5] for the quarter ending Oct. 29.

For the full year ending January  31, 2012, Wall Street expects American Eagle to make 89 cents per share. That’s anticipated to grow by 16% to $1.03 per share in the following year. At current prices the stock trades for 13 times next year’s expected earnings.

If the Christmas season is strong, American Eagle is likely to do better than current Wall Street estimates. At these prices the stock is a buy.

Zumiez (NASDAQ:ZUMZ[6])

One of the hottest teen retailer two years ago was Zumiez, which caters to the extreme sports set. Its shares shot up more than 100% in 2010. But 2011 has been a different story, even though the company’s offerings remain hot. The stock is down 15% this year, but that’s more due to profit-taking than a reflection of operating performance.

In each of the last four quarters Zumiez has exceeded analyst expectations. And on Nov. 2, it announced same-store sales for October[7] that beat Wall Street estimates. For the month, Zumiez stores open for a year or more had a 3.3% sales increase versus an estimate of 2.8%. That performance sets up Zumiez for another earnings beat for the quarter ending Oct. 31.

For the full year ending Jan. 31, Wall Street expects Zumiez to make $1.08 per share. Earnings for the following year are anticipated to grow by 18%. At current prices, its shares trade for 18 times next fiscal year’s estimated earnings.

Given Zumiez’s performance against estimates, it’s reasonable to assume profits will be better than expected. The company deserves a premium valuation for that performance. Any strength in the economy will be an added bonus. I would buy Zumiez at these prices.

  1. WMT: http://studio-5.financialcontent.com/investplace/quote?Symbol=WMT
  2. announced its Black Friday deals: http://www.washingtonpost.com/business/economy/black-friday-2011-wal-mart-announces-its-promotions-daily-deal-sites-change-the-game/2011/11/10/gIQAYeSj9M_story.html?tid=pm_business_pop
  3. TRLG: http://studio-5.financialcontent.com/investplace/quote?Symbol=TRLG
  4. AEO: http://studio-5.financialcontent.com/investplace/quote?Symbol=AEO
  5. it raised guidance: http://finance.yahoo.com/news/American-Eagle-Outfitters-apf-843301646.html?x=0&.v=1
  6. ZUMZ: http://studio-5.financialcontent.com/investplace/quote?Symbol=ZUMZ
  7. announced same-store sales for October: http://www.reuters.com/article/2011/11/02/zumiez-idUSL4E7M24X820111102?feedType=RSS&feedName=cyclicalConsumerGoodsSector&rpc=43

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