Teen Apparel Looks Ready for a Growth Spurt

Apparel retailers focused on the teenage market have been about as stable as the moods of their customers. But as school lets out this summer, the big names in teen fashion look like they're ready to come out of detention.

After stumbling around with heavy discounts, the teen retailers look better this spring. We've seen analysts upgrade both American Eagle Outfitters (NYS: AEO) and Abercrombie & Fitch (NYS: ANF) with the basic thesis that the worst is behind the mall clothing stores.

Many of the issues that have been driving down results (excessive discounting, high cotton prices) are easing, and they're heading into one of the busier times of the year, the summer season that peaks with the back-to-school sales in July.

Meanwhile, the international picture is starting to look up. Teen stores that went looking overseas for growth -- Abercrombie has been especially aggressive expanding in Europe and Asia -- ran smack into the euro crisis, which put a lot of their projections in doubt. But as UBS noted in upgrading Abercrombie, European sales are stabilizing now.

And last, but not least, U.S. customers look primed for spending. More kids will have summer jobs this year, more parents will have money for back-to-school clothes, and the retailers are getting a shot in the arm from lower cotton prices. Spring showed sales of teen apparel are on the mend, even as it's dragging behind the rest of the apparel retail segment. Thomson Reuters calculated same-store sales at some major teen/kids' clothing stores were up an impressive 6.5% in Q1 2012.

A new survey from recruiters Challenger, Gray & Christmas says there will be more jobs for teens this summer. So the youngsters will have more disposable income to spend on what they usually do -- mainly clothes and other discretionary purchases. But especially clothes: Piper Jaffray's annual teen spending survey says 39% of their budgets this year will go for apparel, and they plan to spend more this year than last.

There are a lot of names in this space and a lot of competition, but it pays to focus on the top layer, the big-name brands that kids gravitate to because they're the big-name brands. Teenagers may protest they're individuals, but they shop like lemmings.

Abercrombie has a one-star CAPS rating and doesn't get much love from Fools, but this could be the time to get into the stock. It's trading near the bottom of its 52-week range, after the smackdown that followed its disappointing quarterly report. With its stock trading around $36 and the analysts' consensus target price at $55, it's hard to argue that it's overpriced.

Investors are a bit more positive on American Eagle after the big changes with new CEO Robert Hanson and the closing of its kids business. With the hope that the company can refocus now, the stock has run up to trade around $20, so the consensus target price of $23 doesn't look far-fetched.

Aeropostale (NYS: ARO) , which had been the Abercrombie alternative for kids early in the recession (when Abercrombie had held out from cutting prices) gets a four-star rating from the CAPS community and its results beat expectations, so it hardly needs help getting attention. Like American Eagle, it's had a good run and is trading close to its highs at about $19 per share, but with a consensus target of $23.50, it also looks like it has room to grow.

If the big-picture trends we've seen in apparel hold up into the back-to-school season this summer, teen apparel is all set for a comeback. Of these three, Abercrombie looks like the most likely to deliver, mainly thanks to having been beaten down so long. It may not be the perfect stock, but it has the most comeback potential.

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At the time this article was published Mercedes Cardona does not own shares in any of the companies mentioned in this article. Follow her on Twitter and on her website.The Motley Fool owns shares of Aeropostale. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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