The Next Recession Domino: Boutiques

3/12 - "The teen-apparel seller said Wednesday that its earnings slipped to $140.5 million from $150.2 million a year earlier. Earnings per share for the quarter ended Feb. 2 were flat at 66 cents, reflecting fewer shares outstanding.

The per-share results matched Thomson Financial's average analyst estimate, but were better than American Eagle's forecast of 64 cents to 65 cents.

Shares of American Eagle recently were up $1.13, or 6.6%, to $18.38."

"We are reiterating our Under Perform rating on American Eagle as we think AEO faces headwinds in 2008 due to increased competition, difficult SSS (same-store sales) and peak margin comparisons in a challenging macro environment. Though at ~10.4x our FY08 reduced EPS estimate of $1.73, AEO is trading at a discount to the sector average of ~15x, AEO is trading above its long term organic growth rate of 8% to 10%, given limited square footage growth opportunities and what we think could be a difficult 2008 with negative SSS and earnings growth. Hence, we see another potential 11%-15% downside from current valuations to 9x our lowered FY08 estimate of $1.73, or $15-$16 a share."

"We think the biggest threat to earnings growth is continued traffic declines due to a tough macro environment, merchandise misses, and stronger competition from better product at value-oriented teen retailer Aeropostale (ARO-Buy), which we think is taking share in B and C malls as ARO benefits from the trade-down customer who is noticing the improved assortment."

"Entering 2008, inventories are well-managed, down 5% per square foot, with plans to stringently control levels, while leveraging a “trigger” strategy in tune with shopper trends. The women’s assortment remains a sharp management focus, as well as the largest sales and margin opportunity at the AE brand...Although aggressive clearance of the denim category will hamper 1H08 sales and margins, the new trend-right assortment bodes well for the fall selling season. Following a comprehensive cost structure review, management has identified several areas for expense reduction, including store payroll and non-merchandise procurement. Savings benefits are expected to be evident in 2Q08, with management expecting to leverage full year SG&A expenses on a flat comp."

"The company should be well positioned to exceed expectations in the second half of 2008. We are reaffirming our Positive rating, as we believe the AEO’s 40% discount to its historic average FP/E, or 11.6x our 2008 EPS projection, offers a compelling risk/reward profile."

3/12 - "J.Crew reported Q4 EPS of $0.41 (excluding $0.02 of severance costs) vs. $0.33 LY, above our forecast and Street outlook of $0.39. Total sales were $399.9 million vs. $366.7 million in the prior year, driven by flat same store sales (+4% on realigned basis) and 11% growth in the direct channel."

"We note the potential for earnings upside given outlined product extensions and store expansion plans. Specifically, we see additional growth via crewcuts (10 shop-in-shops, 1-2 freestanding, and inaugural Factory locations in F08) and accessories penetration (including shoes, costume jewelry, and ties) that could have encouraging margin contribution."

"We continue to maintain our positive stance on JCG shares as we view the company’s fresh, innovative Spring assortments as a standout in the current retail environment. Further, we remind investors of the company’s (1) aspirational brand positioning targeting more resilient higher-income consumers, (2) multiple legs of legitimate growth vehicles, (3) meaningful margin opportunity through IMUs and product mix, and (4) improving sales productivity potential. We derive our 12-month price target of $57 by applying a discounted multiple of 27.1x (to reflect the company’s disciplined square footage growth vs. the stock’s 2-year historical forward P/E multiple of 30.9x) to our F09 EPS estimate of $2.10."

3/14 - "Remember Mother’s admonition about how if you couldn’t find something nice to say ….? Ann Taylor Stores (ANN) is taking that to heart. The retailing environment is so cruddy, and the short-term performance so choppy, it just doesn’t acquit itself well anymore when it serves up monthly sales data. So it’s not going to do it."

"Annie missed targets with its fourth-quarter results, coming in a penny a share south of estimates, once it lopped off the charges it took for its on-going restructuring effort. Sales fell, as expected. The outlook isn’t very constructive: the first quarter and the year are both going to miss what analysts had been forecasting."