It is interesting that we have been looking at the same stocks / companies and coming to the same conclusions. Specifically, I bought AEO at around the same time (but prior to your postings) because it is fairly valued if according no growth over the next decade and just 5 percent over the second decade. Any level of growth greater than zero, and it is undervalued. Similarly, Tuesday Morning came up on the screen as wildly undervalued at the same time — as did Macy’s, Nordstroms, and some other retailers. For me, the difference was in a visit to the stores.

AEO sells to teens and early 20′s, so we (my wife and I) checked out Abercrombie and Fitch, Aeropostal, GAP, and the others at the mall. Abercrombie shoppers consisted of concerned teens and frowning parents (prices were too high). Aeropostal had everything marked down and a poverty of shoppers (even if not accompanied by parents). AEO was backed up with shoppers and the logos were well represented among the teens hanging out at the mall. Down market or not, AEO was an evident buy.

As for Tuesday Morning, we visited three of their stores and found metal warehousing shelving with the contents in disarray, sales staff that never graduated high school, and only a few customers. This was not just true of one store, but, rather, it was true of each, and one of the three was newly opened (the carpet wasn’t yet stained). If targeting upper-end shoppers possessing the gift of frugality, you had to wonder which motivation would win out. While am sure there are some Robinson Caruso types among the well-heeled, I couldn’t grasp why customers accustomed to luxury would become Indiana Jones when it came finding bargains among the disarray that seemed consistent from one store to the next. More importantly, I couldn’t grasp the means by which senior management could achieve a turnaround that included a change in culture for this geographically diverse business. A local manager can make such a change quickly, but corporate isn’t going to hit the road or the air and do the dirty work of operational leadership at the local store.

Peter Lynch was something of a hybrid investor — combining value with growth — and was a Buffett favorite before retiring from fund management at Fidelity. In his books, Lynch tells the story of visiting the local mall and seeing the foot traffic entering Bed, Bath, and Beyond (which, by the way, appears undervalued today). He bought the stock on the strength of that observation and was well rewarded for the effort. The same approach got me into American Eagle and kept me out of Tuesday Morning. I haven’t been gloriously rewarded for my purchase of AEO, but I am happy to hold it until teens select nudity as a fashion choice. By the same token, if there were no time limit on shorting stocks, Tuesday Morning would be first on my list.

Thanks,

Robert

I like the company, the repeat business it gets and the fact that if one of their concepts starts to fail, they can sell it off and re-invest the proceeds elsewhere.