Time for an Inventory Check at Aéropostale, American Eagle, Abercrombie

Time for an Inventory Check at Aéropostale, American Eagle, Abercrombie

MIRIAM GOTTFRIED

May 23, 2014 3:00 p.m. ET

In apparel retail, as in life, the teen years are difficult. But for many companies focused on the teen market, the signs of oncoming angst can be fairly predictable.

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Same-store sales and share prices have tumbled at companies like Aéropostale,American Eagle Outfitters AEO +0.93% and Abercrombie & Fitch ANF -0.11% over the past year as the retailers have lost market share to fast-fashion competitors like H&M-owner Hennes & Mauritz HM-B.SK -0.11% and Forever 21. Things have been slow to turn around at the less-nimble traditional chains, a reality compounded by the fact teens have been spending more on electronics than on clothes.

For investors tempted to call a bottom, one metric can be particularly telling: inventory.

The relationship between inventory and sales can tell a story about what future quarters might look like. If inventory and sales are roughly in line, companies are holding more inventory than they are selling. If sales growth exceeds inventory growth, there will be a shortage of goods to stock shelves. And if inventory increases faster than sales, there will be lots of leftover merchandise to discount, pushing margins down.

Inventory levels at the 200 publicly listed retailers have reached equilibrium over the past year, with year-over-year sales growth and inventory growth both at 3.5% in the fourth quarter of 2013, according to David Berman, manager of retail-focused hedge fund Durban Capital. That compares with sales growth of 4.1% and inventory growth of 4.6% in the fourth quarter of 2012.

At teen retailers, however, the trend has been moving in the opposite direction. In the fourth quarter of 2013, sales rose 0.5% year over year, while inventory climbed 8.9%, Mr. Berman’s numbers show. That compares with sales growth of 4.8% and inventory growth of 1.8% in the fourth quarter of 2012.

Indeed, excess inventory was a point of pain among many of the teen retailers that reported first-quarter earnings this week. Urban Outfitters URBN +0.03% said sales rose 6%, while inventories increased 7%. Things were particularly bad at the company’s more teen-focused namesake brand where same-store sales fell 12%. This will mean greater promotional activity in the second quarter, pressuring margins.

Inventory at American Eagle fell 3%, but sales declined 5%. Management said it was reducing levels for the second half of the year but that the second quarter would be spent clearing excess inventory.

Granted, inventory isn’t everything. Aéropostale, whose shares dropped more than 20% Friday after its first-quarter report, said it was reducing its inventory purchases by double-digit percentages in the second and third quarters. While the leanness should limit margin pressure, Aéropostale needs to update its merchandise to get teens tired of logo T-shirts, hoodies and denim back in the door, says Stifel Nicolaus.

Abercrombie, which is among the teen retailers slated to report earnings this coming week, said inventory climbed 24% in the fourth quarter as sales fell 12%. That’s one gap investors don’t want to fall into.

 

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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