Forget Bebe Stores: Buy These 3 Apparel Stocks Instead

Investment ideas aren't always only about which stocks to buy; they also entail suggesting which stocks to sell and why. Normally, people already aware when it's time to cut losses, but sometimes investors just don't want to take the loss and move on.

Exiting an underperforming stock at the right time helps maximize your portfolio's return. Hence, as an investor, it would be a prudent decision to shun from your portfolio a stock that has been witnessing falling share price and estimates, before it hurts your return.

Bebe Stores, Inc. BEBE, which designs, develops and produces a unique line of fashionable women's apparel and accessories, is one such stock whose share price has been plunging. The Zacks Consensus Estimate too, has witnessed a downtrend.

Dwindling Stock Price

Shares of Bebe Stores declined 8.6% to $1.07 last Friday, hovering near 52-week low. In the past six months, the shares have nosedived more than 70%. Moreover, the stock has plunged roughly 43% following its last earnings release on Aug 27. It has been nearly seven months since this Zacks Rank #4 (Sell) stock hit a 52-week high. It had last reached the pinnacle on Feb 13, 2015.

The company reported fourth-quarter adjusted loss per share of 5 cents, a penny wider than the Zacks Consensus Estimate of a loss of 4 cents. Net sales of this woman's clothing and accessories designer improved by a marginal 0.7% year over year to $104.3 million but fell short of the Zacks Consensus Estimate of $105.5 million.

Which Way Are Estimates Treading?

Apart from its discouraging performance, Bebe Stores also provided a subdued outlook. The company believes sales for the first quarter of fiscal 2016 will continue to be impacted by markdowns on slow moving merchandise. For the first quarter, Bebe projects comps to decline in the mid-single digit range.

Gross margin is expected to contract year over year owing to increased markdowns in the early part of the quarter in order to clear excess inventory related to the failure of the July Bohemian collection. Further, net loss per share for the first quarter is expected in the high-teens range. This guidance also reflects continued impact from the maintenance of valuation allowance over deferred tax assets, resulting in nearly 0% effective tax rate.

Analysts polled by Zacks are now less constructive on the stock's future performance. Over the past 30 days, the Zacks Consensus Estimate of a loss of 17 cents for first-quarter fiscal 2016 and a loss of 29 cents for the full fiscal year have widened by 22 cents and 13 cents, respectively.

With its share price plunging and estimates witnessing downward revisions, it would not be viable to keep this stock in your portfolio at least for the time being.

Here, we have highlighted 3 stocks in the Apparel Stores space for investors, on the basis of their Zacks Rank, sound Zacks Consensus Estimate revision and sturdy fundamentals:

3 Prominent Picks

Athletic shoes and apparel retailer, Foot Locker, Inc. FL is a stock to bet on, backed by its impressive past performance. The stock sports a Zacks Rank #1 (Strong Buy) and has surged roughly 31% year to date. The company has delivered positive earnings surprises in the trailing eight quarters and has a long-term growth rate of 11.5%.

The company is expected to witness earnings growth of 17% in fiscal 2015 and 12.3% in fiscal 2016. Further, the Zacks Consensus Estimate has been showing an uptrend over the past 60 days.

We also suggest investing in American Eagle Outfitters, Inc. AEO, a retailer of apparel and accessories. This Zacks Rank #2 (Buy) stock has amassed a year-to-date return of more than 16% and has a long-term earnings growth rate of 10%. The Pittsburgh, PA-based company has delivered an average positive earnings beat of 15.9% over the trailing four quarters. It is expected to witness earnings growth of 61.7% in fiscal 2015 and 8.9% in fiscal 2016. The Zacks Consensus Estimate too, has been on the rise over the past 60 days.

Another Zacks Rank #1 stock that investors may look into is Express Inc. EXPR. Shares of this specialty apparel and accessories retailer have surged 27.7% so far this year. An average positive earnings surprise of 34.2% over the trailing four quarters and long-term earnings growth rate of 15%, make this Columbus, OH-based player quite an attractive investment option. The company is expected to witness earnings growth of 69.4% in fiscal 2015 and 9.6% in fiscal 2016. The Zacks Consensus Estimate has also trended upward over the past 60 days.

Bottom Line

Investors can confidently end their search at stocks with a better Zacks Rank, of either #1 or #2, which encompasses its strong fundamentals, promises favorable price movement and highlights analysts' constructive view on the same via positive estimate revisions. Remember, a sturdy portfolio always gives higher returns.

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