2 Hot Apparel Stocks That Are Bucking the Downward Trend in Retailing

Amid a barrage of poor earnings from retail heavyweights, American Eagle (AEO) - Get Report and Urban Outfitters (URBN) - Get Report  stand out. These companies either met or beat analysts' estimates for adjusted earnings per share. They also reported better-than-expected same-store sales, a key gauge of retailing performance. 

These numbers are heartening, given that traditional retailers (especially those selling apparel) are succumbing to the headwinds of higher cost structures, inventory build-up and changing buyer preferences.

In this tricky environment, rock-solid stocks are much-coveted rarities. Here are the details on why these retail stocks could turn into rock-solid holdings.

1. Urban Outfitters 

Urban Outfitters owns its eponymous brand as well as Anthropologie, BHLDN, Free People, Terrain and Vetri. The company reported first-quarter adjusted earnings per share of 25 cents, in line with analysts' projections. The company's revenue of $762.6 million, up 3.2% year over year, beat estimates.

Urban Outfitters said its gross profit margin improved because of improved inventory management and stronger marketing. The flagship Urban Outfitters brand saw significantly lower markdowns compared with the same quarter a year earlier.

After falling more than 25% from early April to last Wednesday (just before earnings), the stock galloped higher on the back of the earnings report.

Bear in mind, the company doesn't indulge in sharp price cuts and has still managed to ring in a 1% comparable-store sales growth. Plus, it's becoming increasingly clear that in the apparel retailing world, there's massive product oversupply. Department stores such Kohl's recently claimed consumers weren't buying apparel. Macy's has also recently suggested the same. Shares of upscale retailer Nordstrom plunged to a five-year low after the company lowered its outlook for earnings and sales.

On the other hand, Urban Outfitters is clearly bucking the trend and shaping up to be a long-term growth investment. With just $75 million in total debt, this company has the flexibility to invest for growth and reach the average annual EPS growth rate of 12% that analysts are predicting for the next five years.

The average 12-month price target from analysts who cover this stock is $33, which suggests shares can gain another 15% in the next year. This stock also has an attractive forward price/earnings-to-growth ratio of 1.17. That makes it cheaper than L Brands (1.51), The Gap (1.62) and Guess? (2.22). Urban Outfitters should be a part of your wealth-building plan.

2. American Eagle

For those looking for a retail stock that offers solid yields and great earnings prospects, American Eagle is the answer.

American Eagle's 3.2% yield (two years of dividend growth and payout ratio of 41%) combined with what analysts forecast as 16% adjusted EPS growth in the current year (ending January 2017), presents a compelling investment case.

The first quarter was a great example of American Eagle's sturdy and resilient business model, besides its potential to surprise the Street. (It beat on both revenue and adjusted EPS). First-quarter net income grew 39%. Same-store sales were up 6%. Overall revenue grew 7.1%. The company's strategy of investments in advertising other key initiatives hugely helped its cause.

For the second quarter, American Eagle estimates a low-single-digit rise in comparable sales. This helped the company offer guidance for adjusted EPS of 20 cents to 21 cents, vs. previous expectations for 20 cents.

Earlier this month, once-hip teen clothing retailer Aeropostale filed for Chapter 11 bankruptcy protection. Rival American Eagle seems to be making all the right moves to avoid a similar fate. 

As a leading global specialty retailer, American Eagle offers high-quality, on-trend clothing, accessories and personal care products at affordable prices. The fact is, American Eagle has been able to revamp its brand over the last two years.

Additionally, AEO has been closing underperforming stores in the U.S. and expanding its footprint internationally. The global e-commerce presence and rejigging of less profitable segments has worked.

The average 12-month price target from analysts who cover the stock is $18, which suggests shares of American Eagle Outfitters can gain another 13% in the next year. The 3.2% yield will pay you while you're waiting for the shares to rise.

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This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.