Investing in the "Hipster" Movement with these Retailers

Investing in the "Hipster" Movement with these Retailers

The term "hipsters" is thrown around a lot, but it's best known as a subculture that's characterized by progressive political views, indie music, and a less-than mainstream fashion sense. One of the biggest fashion trends that's tied to hipsters is skinny, or tight-fitting, jeans.

The apparel retailers have been scrambling to adjust to the latest trend, but there's one company that's heavily tied to its jeans, and could suffer the most from this trend, and that's Guess? .

Guess soared nearly 20% earlier this month on news that earnings per share beat consensus estimates by 40%. However, is the move irrational exuberance? The volatility of the apparel-retail industry has been well discussed, and it appears Guess? isn't immune.

In less than a month and a half, the retailer has traded as high as $34, as low as $27, and now trades at around $30. Given the company's reliance on the jean market, which is seeing hipster-related pressures, I don't think it will be long before we see another steep pullback in the stock.

Guess? is known for its jeans, but the company is seeing increased competition thanks to the hipster movement. While Guess? does cater to the hipster-jean market, the competition is no doubt picking up. Buckle's Lucky Brand offers hipster jeans, and American Eagle Outfitters is embracing the movement.

Pressures are mounting
For the July-ended quarter, Guess? saw North American retail comps down 2% sequentially. And August comps were down in the mid-single digits as back-to- school traffic was weaker than expected. Guess? needs a revitalization, but there's many headwinds.

The company is experiencing weakness across all major markets. Both North America and Europe are weak, but its other up-and-coming segment, China, also appears weak. Revenue for China was down in the mid-teens year-over-year for Q2. The fact that Guess? gets two-thirds of its operating profits from Europe should be enough to frighten any investor. But the company also saw North American retail revenue decline each quarter, sequentially, during fiscal 2013.

And although the unemployment rate in the U.S. is off its 2009 highs, it still remains above 7%. Job growth has a big bearing on discretionary spending. With a large portion of the population being underemployed or unemployed, it will be tough to find shoppers willing to spend $100 for a pair of Guess? jeans.

American Eagle is another one of those volatile apparel retailers, having lost 25% of its market cap since the start of August. Both sales and earnings were down year-over-year last quarter, with higher-than-expected operating expenses eating away at profits.

Buckle, another major jean company, offers Big Star, Miss Me, Rock Revival, Silver Jeans, and Buffalo Jeans brands. Half of Buckle's entire branded merchandise is exclusive, which gives the company a leg up. I think Buckle will continue to take market share from the likes of Guess? with its lower-priced jeans. What's more is that Buckle is also looking to expand its product offerings, seeking to increase its active-wear and footwear products.

If we take a quick look at valuation, we see that Guess? is trading at 16.2 times earnings, compared to American Eagle's 13.2 times and Buckle's 15.3 times. Guess' 16.2 P/E is also well above its five-year average P/E of 12.5 times.

Analysts also appear to be questioning Guess' ability to grow. Wall Street expects the jean-maker to grow EPS at an annualized 6.4% over the next five years, putting its PEG ratio at a relatively high 2.6.

In addition, Guess? has seen its inventory levels increase over the past few years, which has increased the time it takes for the company to sell inventory and collect cash, another negative sign. The company's cash-conversion cycle has grown from 56 days in 2009 to 85 during the trailing-12 months.

Bottom line
The hipster movement has put a strain on a number of apparel industries, and the jean industry is no different. I'm not a big fan of Guess? given the company's exposure to jeans, over-reliance on the slow-growth European market, and its valuation.

There are, however, other stocks in the apparel-retail market that could be worth buying. One such company is Buckle, where the company is embracing lower price-point jeans, active wear and footwear.

The retail space is in the midst of the biggest paradigm shift since mail order took off at the turn of last century. Only those most forward-looking and capable companies will survive, and they'll handsomely reward those investors who understand the landscape. You can read about the 3 Companies Ready to Rule Retail in The Motley Fool's special report. Uncovering these top picks is free today; just click here to read more.

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Marshall Hargrave has no position in any stocks mentioned. The Motley Fool recommends Guess? and The Buckle. The Motley Fool owns shares of Guess? and The Buckle. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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