Teen Retailers Show Faint Signs of Life (URBN, AEO, ARO)

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Specialty apparel chains such as Urban Outfitters, Inc. (URBN), American Eagle Outfitters (AEO) and Aeropostale Inc (ARO) enjoyed better-than-expected holiday sales, but the outlook for these mall-based retailers still remains bleak.

Teen Retailers Show Faint Signs of Life (URBN, AEO, ARO)True, URBN and ARO rallied on the news, and we’ve got to give all three of these teen chains credit. Better-than-expected sales and margins were by no means a given over the holiday selling period. Just ask Wet Seal Inc (WTSL), which was forced to shutter two-thirds of its stores and lay off 3,700 employees after a nightmare of holiday results.

Teen specialty retailers are under assault from so many sides, it tough to see an out for them. Traffic to the mid-market malls where these retailers live has been in relentless decline, hurt by the closure of anchor stores owned by Sears Holdings Corp (SHLD) and J C Penney Company Inc (JCP). At the same time, teens — as fickle about fashion as ever — are increasingly opting for so-called fast-fashion stores like H & M Hennes & Mauritz AB.

The bottom line is that mall-based retailers like Urban Outfitters, American Eagle and Aeropostale are in serious trouble, and a poor holiday season would have been perhaps too big a blow to withstand.

Happily for anyone who hold shares in URBN or ARO, the holiday selling season delivered an upside surprise. (In the department store segment, JCP enjoyed improved holiday sales and margins too.)

ARO, AEO, URBN Beat Expectations

The market loves it when a company lifts its outlook, and AEO and ARO did just that. URBN also looks on track to exceed Wall Street estimates.

American Eagle said same-store sales fell 2% over the holiday selling season, but — importantly — turned positive in December. That should allow AEO to easily beat Wall Street’s forecast for a 4.4% decline in quarterly same-store sales. Even better, American Eagle hiked its fourth-quarter profit projection to 32 cents to 34 cents a share from prior guidance of 30 cents to 33 cents a share.

ARO said same-store sales dropped 9% versus a forecast for a 9% slump, but margins were surprisingly strong. That allowed Aeropostale to narrow its guidance. The company now expects a fourth-quarter loss of 25 cents to 31 cents, instead of 37 cents to 44 cents.

Meanwhile, same-store sales at Urban Outfitters beat Street forecasts, rising 4% against estimates for 2.5% growth.

That said, as much as holiday sales didn’t poop the bed at these teen retailers, the results were only better-than-expected — not particularly good. It’s also worrisome that even if these retailers are able to offer more compelling fashions, they still depend heavily on mall traffic, and that’s something they can’t do much about.

That’s why any upside over the next few days in Aeropostale, Urban Outfitters or American Eagle is likely to be short-lived, with sideways trading ahead about the best an investor should expect. For some perspective, URBN and AEO are down 4% and 7%, respectively, over the last 52 weeks. ARO is off nearly 70%, and betting on a rebound play with this stock is too high-risk for most investors.

Kudos to the AEO, ARO and URBN for getting through the holiday selling season as well as they did, but better risk-reward scenarios can be found elsewhere.

As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/01/american-eagle-urbn-aeo-aro/.

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