8 Teen Retailers: Which Stocks Make the Grade?

NEW YORK ( TheStreet) -- Teen retailers wrapped up their fourth-quarter earnings reports. Here's a look at how the sector fared.

Wet Seal

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Wet Seal ( WTSLA) reported a lower fourth-quarter profit, but still managed to top forecasts.

During the quarter the teen retailer earned $5.3 million, or 5 cents a share, compared with a profit of $74.2 million, or 73 cents, in the year-ago period.

Excluding items, Wet Seal actually earned 7 cents a share, two cents higher than estimates.

Revenue rose nearly 10% to $165.5 million, while same-store sales increased 2.3%.

Looking ahead, Wet Seal forsees first-quarter earnings in the range of 5 cents to 7 cents a share, in-line with Wall Street's outlook of 6 cents.

In March, the company said it will open 50% fewer stores in 2011 than it previously planned. It will now roll out between 25 and 27 namesake stores and four Arden B locations.

Wet Seal is also in a management transition. In January, Susan McGalla took the reigns as CEO, replacing Ed Thomas, who was heading the company on an interim basis.

Pacific Sunwear of California

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Pacific Sunwear of California ( PSUN) disappointed Wall Street when it reported a bigger-than-expected fourth-quarter loss and issued a first-quarter outlook that fell short of estimates.

During the quarter the teen retailer lost $35 million, or 53 cents a share, compared with a loss of $36 million, or 56 cents, in the year-ago period. Excluding one-time items, PacSun actually lost 33 cents a share, more than the 27 cents analysts expected.

Revenue fell 10% to $263 million, shy of Wall Street's forecast of $272 million.

Looking ahead, PacSun forsees a first-quarter loss in the range of 29 cents to 35 cents a share, while analysts were looking for a loss of 22 cents.

This guidance is the most disappointing out of the teen sector for the first quarter.

Wall Street Strategies analyst Brian Sozzi believe PacSun is losing market share to Zumiez, "which boasts an authentic feel to its stores and the name brands needed to boost street cred," he wrote.

Sozzi reiterated his sell rating on the stock and $4 price target.

Aeropostale

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Aeropostale ( ARO) was taking a hit on Friday, after the teen retailer reported a 13% decline in fourth-quarter profit due to soft sales, and warned of rising costs.

During the quarter, the company earned $83.8 million, or 95 cents a share, compared with $96.6 million, or 99 cents, in the year-ago period. Excluding a higher tax rate, Aeropostale actually earned 98 cents, which was a penny above analysts' estimates, but still below company forecasts.

Revenue grew 5% to $839.3 million, while same-store sales declined 3%. Wall Street was looking for sales of $837.2 million.

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A highly promotional environment and fashion misses dragged down results in the fourth quarter.

In 2011, Aeropostale plans to spend about $70 million to open about 30 namesake stores, 20 P.S. by Aeropostale locations, and remodel 50 stores.

Looking ahead, management foresees first-quarter earnings in the range of 35 cents to 38 cents a share, and full-year profit between $2.20 and $2.40 a share. Wall Street is looking for a profit of 43 cents and $2.54 for the first-quarter and 2011, respectively.

The company said it expects costs to rise between 3% and 5% in the first half of the year and 10% to 15% in the second half. To offset these costs, Aeropostale said it is leveraging its vendor relationships and strategically raising some prices, as well as buying product a bit more conservatively.

But regardless of Aeropostale's disappointing results, several analysts reiterated their buy rating on the stock.

"We continue to believe the company's low price, discount-driven business model, will drive results when inventory (and pricing pressures) normalize," Brean Murray analyst Eric Beder, wrote in a note.

This weak forecast is also expected to reignite takeover chatter that arose in December.

"With the current stock valuation and exceptional cash flow characteristics of the company, we believe Aeropostale is an attractive LBO candidate, particularly given the tough comparisons that the company is anniversarying, the limited visibility for growth in the near term and the recent changes in leadership," Stifel Nicolaus analyst, Richard Jaffe, wrote in a note.

Earlier in the week, Aeropostale announced that it will expand into Asia with a licensing agreement with Montreal PTE, a joint venture between Apparel Group and Jay Gee Melwani. The company plans to open 25 stores across Singapore, Malaysia and Indonesia over the next five years. The first store is slated to open in Singapore later this year.

Zumiez

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Has Zumiez fallen from its pedestal? The skate and surf inspired retailer warned it could report a loss in its first quarter due to rising costs.

This came as a surprise to investors, as Zumiez has outperformed its peer group over the past year. Shares were down $1.50, or 5.3% to $26.68 on Friday.

For the first quarter, the teen retailer is predicting a loss of 3 cents to break even and foresees same-store sales to rise in the mid-to-high single digits. Wall Street was calling for a profit of a penny.

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"The cost pressures are real and it appears they are here to stay, at least for the foreseeable future," Chief Executive Rick Brooks said on a conference call with analysts.

To offset some of these costs, Zumiez said it may raise prices on some of its product. Like Aeropostale, Zumiez expects an average increase in costs of 10% to 15% in the second half of the year.

Janney Capital Markets analyst Adrienne Tennant believes guidance is conservative, which is typical for Zumiez management.

Tennant believes that because nearly half of Zumiez's product is non-apparel, it could ease its reliance on pricey cotton. Also, 85% of its merchandise is branded, which could give it an edge in passing some of the costs along to customers.

But Zumiez has been very clear that it will respond to customer willingness to accept higher prices and respond accordingly. Another option to offset costs is trading down to private labels.

In the fourth quarter, Zumiez earned $15 million, or 49 cents a share, compared with $8.8 million, or 29 cents, in the year-ago period.

Sales grew 18% to $156.2 million.

"We believe the long-term growth story remains on track, and as we have discussed, with competitor Pacific Sunwear of California ( PSUN) targeting an older age range, we expect Zumiez to continue to capture market share," Tennant wrote.

Buckle

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Premium denim retailer Buckle ( BKE) saw its fourth-quarter income rise 17% on strong sales.

During the quarter, the company earned $49.5 million, or $1.05 a share, compared with $42.1 million, or 90 cents, a year earlier. Revenue grew 10% to $303 million, while comparable sales shot up 6.3% for the period.

Analysts were calling for a profit of $1 a share on revenue of $302.4 million.

Susquehanna Financial analyst Thomas Filandro names Buckle his top stock pick for 2011 based on: superior operating margins that are sustainable; competitive edge due to its unique service-centric approach, boutiquelike atmosphere and balance of private and branded labels; strong cash position and history of returning excess cash to shareholders; dividend yield of 2.2%; positioning that allows for price increases amid rising costs; and easing sales comparisons.

American Eagle Outfitters

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American Eagle Outfitters ( AEO)reported a 47% jump in fourth-quarter profit, but sales fell short.

During the quarter, the company earned $87 million, or 45 cents a share, compared with $59.3 million, or 28 cents, in the year-ago period. Sales dropped 4% to $916.1 million from $955.8 million, while same-store sales tumbled 7%.

Analysts were calling for a profit of 43 cents on revenue of $919.6 million, while same-store sales dropped 7%.

"In the fourth quarter, we had some areas that were not up to our expectations," Roger Markfield, vice chairman and executive creative director, said in a call with analysts. "Women's tops, including sweaters, should have been stronger. On the men's side, frankly, we did not invest enough in key items, and missed an opportunity to drive higher volumes."

For the first quarter, American Eagle is calling for a profit of 13 cents to 17 cents a share, based on a same-store sales decrease of 3% to flat. In 2011, management expects earnings of $1.02 a share. Wall Street is looking for a profit of 16 cents and share and $1.09, for the first quarter and full year, respectively.

American Eagle also made note of product cost inflation and said it will raise some prices. But the company does not expect to be able to offset all of these costs.

>>Retail Cotton Tales: Execs Weigh In on Rising Costs

Internationally, American Eagle plans to open 20 franchise stores this year in the Middle East, China, Russia and Hong Kong.

Separately, the teen retailer also announced the retirement of its CEO James O'Donnell. O'Donnell, 70, will remain on board until the company finds new leader.

This comes at a time when American Eagle has been the target of takeover speculation.

Analysts are sticking behind American Eagle, saying it is one of the best turnaround stories in the sector.

But Beder reiterated his sell rating on the stock following results, saying "the company's business model remains broken."

"While management continues to tout its key initiatives, including strengthening assortments, carefully managing inventory levels and continuing with its corporate profit initiative of reducing costs through better supply management, results have stagnated in the last several quarters, leaving us to believe that the business model remains in serious trouble," he wrote in a note.

Hot Topic

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Hot Topic ( HOTT) declined to issue a first-quarter outlook this week, as it turns to a consultant to review its business and operations.

The teen retailer, which reported results a day early, swung to a loss in its fourth quarter of $600,000, or 1 cent a share. On an adjusted basis, Hot Topic actually earned 12 cents, a penny shy of Wall Street's estimates.

In November, Hot Topic announced plans to shutter between 40 to 50 stores, or 5% to 6% of its total fleet, by the end of the first quarter. During the fourth quarter the company closed 23 namesake stores, one Torrid store and opened three new Torrid locations.

Wall Street hoped the niche retailer turned the corner when it reported better-than-expected February same-store sales.

It appears the difficult comparisons Hot Topic has experienced in recent months due to the Twilight franchise have abated, and that the company can return to focusing on turning the business.

Hot Topic is seeing success with its move to feature more mainstream music offerings. While Hot Topic is no longer a destination for head-to-toe apparel, major album releases should spark sales.

Tennant also notes that Hot Topic is moving away from goth and punk apparel products and more toward pop culture icons, which should widen its target audience and generate a broader customer base.

Hot Topic was upgraded earlier in the month to hold from sell by Sozzi, who believes Hot Topic was poised to receive a surprise boost on earnings in the first half of 2011 from store closures and a lean inventory position.

Sozzi blames CEO Betsey McLaughlin for some of Hot Topic's blunders, and believes McLaughlin could be dethroned from her post.

Abercrombie & Fitch

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Abecrombie & Fitch ( ANF)set the bar high when it reported fourth-quarter earnings at the end of February.

During the quarter, Abercrombie & Fitch earned $92.6 million, or $1.03 a share, compared with $47.5 million, or 53 cents, in the year-ago period. Excluding a charge related to store closings and a writedown, Abercrombie actually earned $1.38 a share, better than analysts' estimates of $1.31 a share.

Abercrombie revenue grew 23% to $1.15 billion from $936 million, in line with forecasts. Its same-store sales jumped 13%.

The company also said it will shutter about 50 underperforming domestic stores in 2011 and plans to nearly double its spending as it boosts international growth.

It was also a relief for investors to learn that Abercrombie plans to price its merchandise higher both domestically and internationally after cutting ticket prices significantly amid the recession.

"While there is more opportunity to increase prices internationally, the domestic business is more difficult and will be closely monitored," analyst Jennifer Black of the firm bearing her name, wrote in a note. "However, we believe that as long as the fashion remains compelling, as it is now, consumers should be willing to accept higher price points."

As expected, Abercrombie & Fitch did not release first quarter guidance.

Have questions or comments about retail stocks? Drop an e-mail or Tweet http://twitter.com/jpoggi.

--Written by Jeanine Poggi in New York.

>To contact the writer of this article, click here: Jeanine Poggi.

>To follow the writer on Twitter, go to http://twitter.com/jpoggi.

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