Two Retailers, One To Buy And One To Avoid

Retail, especially apparel, is one of the hardest sectors to invest in because it can be, in many cases, among the hardest industries to profit in and that is increasingly...

By Thomas Hughes • May 25, 2022

MarketBeat.com - MarketBeat

This story originally appeared on MarketBeat

Be Choosy When Buying Retail Stocks

Retail, especially apparel, is one of the hardest sectors to invest in because it can be, in many cases, among the hardest industries to profit in and that is increasingly true in the post-pandemic environment. While Abercrombie & Fitch (NYSE: ANF) has the brand recognition it needs to succeed, it doesn't resonate with customers the way Ralph Lauren (NYSE: RL) does and there is a bigger problem. Abercrombie & Fitch is working hard to break the shackles of mall-based operations but it's still struggling and it shows in the results.

Abercrombie & Fitch Implodes On Supply Chain Woes

Abercrombie & Fitch had a very mixed quarter and not in any way we can spin for the good. The company produced $812.76 million in net revenue but that is just about where the good news ends. The revenue is up 4.0% from last year and beat the Marketbeat.com consensus by 170 basis points but shut-downs in China and inflation cut into both the top and bottom line.

Moving down to the margin, the company's margin contracted considerably under the pressure of rising costs and produced a surprise loss for the quarter. To add insult to injury, the company also lowered its guidance to a range below the analyst consensus which was no catalyst for higher share prices. In our view, with inflation on the rise and Abercrombie & Fitch out of favor with consumers, we see ample opportunity for the company to miss its own guidance.

Ralph Lauren, on the other hand, had a much different quarter due to a more favorable view from the marketplace. This retailer reported $1.53 billion in sales for a stronger 18.6% of the growth that beat the Marketbeat.com consensus estimate. The revenue gain was driven by double-digit strength in all geographic regions led by a 26% increase in Europe. In North America, the largest market, comps are up 21% on a 27% increase in eCommerce and 19% increase in brick & mortar sales. Turning to Ralph Lauren's margin and earnings, the company was able to widen its margin at both the gross and operating levels to deliver accelerated earnings growth of nearly 29%. The $0.49 in adjusted EPS also beat the consensus by $0.08.

Ralph Lauren Pays You To Own It

While holders of Abercrombie & Fitch are paying dearly for it, holders of Ralph Lauren are getting paid. Ralph Lauren pays a dividend worth more than 3.0% compared to Abercrombie's 0.0% and there is a positive expectation for dividend increases. Not only is the company delivering growth but it is a known dividend-grower that just increased its payout. The company raised its payout for the first time since reinstating it post-pandemic and it was a large 9.0% increase. The new payout is less than 25% of the earnings and the balance sheet is sound so we are viewing this as a safe dividend.

The Technical Outlook: A Bottom For Ralph Lauren

Shares of Abercrombie & Fitch are down 30% and might be at the bottom but we aren't buying them. Instead, we're focusing our attention on Ralph Lauren which is showing a little more resilience. The stock moved lower in early trading but has since reversed course to show support at the current level. Assuming the market is able to hold this level, we see the stock moving sideways until there is a clearer picture of the economy. Our forecast for Abercrombie & Fitch is a fall below $18.75 and a move back to the pandemic low.
Two Retailers, One To Buy And One To Avoid

Ralph Lauren is a part of the Entrepreneur Index, which tracks some of the largest publicly traded companies founded and run by entrepreneurs.

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