More Squawk From Jim Cramer: Be Careful with Apparel Stocks

NEW YORK (TheStreet) -- Retailers such as American Apparel (AEO) , Urban Outfitters (URBN), Gap (GPS) and Bed, Bath & Beyond (BBBY) announced lackluster sales results this week.

Most of these retailers are in the apparel industry, TheStreet's Jim Cramer pointed out on CNBC's Squawk on the Street this morning. "Be careful with apparel," he said.

American Eagle's 2015 fourth quarter comparable-store sales missed estimates, Gap's same-store sales declined 4% in December and Urban Outfitters's holiday season same-store sales were down 2%.

"Maybe they're serving that pizza now," Cramer joked about Urban Outfitters's decision to acquire the entire The Vetri Family group of Italian restaurants, including Pizzeria Vetri. "I'll take some pepperoni to go with a bridal dress from Anthropologie - that's always been a winning strategy."

Bed Bath & Beyond, though not an apparel company, has similarly been struggling as it attempts to compete with e-commerce giant Amazon.com (AMZN), Cramer noted. Even with all of the coupons Bed, Bath & Beyond mails to customers, it cannot beat Amazon.com's prices, Cramer contended.

Despite the difficult environment facing these retailers, many of them have bought back stock. Cramer pointed out that the share buybacks have done very little for the companies, as he compared the retailers to banks with diminishing assets.

"We don't want companies that buy back stock in retail," Cramer argued. "We want growth retailers. I'm frankly disappointed in a lot of retailers for not understanding that."

Retail companies should improve their numbers through innovation, as Ulta and L Brands (LB) have been, Cramer stated. Before yesterday's market open, L Brands reported December same-store sales surged 8%.

Separately, recently, TheStreet Ratings objectively rated this stock according to its "risk-adjusted" total return prospect over a 12-month investment horizon. Not based on the news in any given day, the rating may differ from Jim Cramer's view or that of this articles's author. TheStreet Ratings has this to say about the recommendation:

We rate AMERN EAGLE OUTFITTERS INC as a Buy with a ratings score of B-. This is driven by several positive factors, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its revenue growth, solid stock price performance, impressive record of earnings per share growth, compelling growth in net income and attractive valuation levels. Although the company may harbor some minor weaknesses, we feel they are unlikely to have a significant impact on results.

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • AEO's revenue growth has slightly outpaced the industry average of 4.4%. Since the same quarter one year prior, revenues slightly increased by 7.6%. Growth in the company's revenue appears to have helped boost the earnings per share.
  • Looking at where the stock is today compared to one year ago, we find that it is not only higher, but it has also clearly outperformed the rise in the S&P 500 over the same period. Although other factors naturally played a role, the company's strong earnings growth was key. Looking ahead, unless broad bear market conditions prevail, we still see more upside potential for this stock, despite the fact that it has already risen over the past year.
  • AMERN EAGLE OUTFITTERS INC reported significant earnings per share improvement in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past year. We feel that this trend should continue. During the past fiscal year, AMERN EAGLE OUTFITTERS INC increased its bottom line by earning $0.46 versus $0.42 in the prior year. This year, the market expects an improvement in earnings ($1.09 versus $0.46).
  • The net income growth from the same quarter one year ago has significantly exceeded that of the S&P 500 and the Specialty Retail industry. The net income increased by 720.3% when compared to the same quarter one year prior, rising from $9.03 million to $74.11 million.
  • You can view the full analysis from the report here: AEO

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