It's truly been a roller coaster ride for apparel retailers in the first quarter of 2007. With an early Easter, unusual weather patterns, and a sluggish economy including high gas prices and the slumping housing market, sales patterns have been tough to read.
Now that the quarter is coming to a close we can look at three-month results, making it easier to separate winners from losers and identify a few players in the middle who just "rode out" the difficult beginning of 2007. Abercrombie & Fitch
Comparable sales rule
Apparel retailing is about momentum. If you've got it, the world is a wonderful place. If not, there's no joy in Mudville. Look at this chart of comparable-store sales for a selected universe of apparel retailers:
|
QTR1 2007 |
QTR1 2006 |
Full Year 2006 |
|
|---|---|---|---|
|
Abercrombie |
-4% |
6% |
-3% |
|
Aeropostale |
2.5% |
-2.9% |
2% |
|
Gap |
-4% |
-9% |
-7% |
|
American Eagle |
6% |
9% |
12% |
|
Urban Outfitters |
-2% |
-3% |
-6% |
|
Limited |
4% |
5% |
7% |
The full-year 2006 shows prior trend, with the first quarter this year and last year illustrating recent momentum. Abercrombie had soft sales last year, which continued into the first quarter, but was up against solid comps from last year's first quarter. I call it not quite treading water, especially with all four of Abercrombie's formats posting negative comps during the first quarter.
Downward momentum is obvious for Gap and Urban Outfitters. Aeropostale is gaining steam and American Eagle Outfitters and Limited are running strong. J. Crew
To the bottom line
Once you understand comp sales trends, the rest of Abercrombie's results are predictable. Total sales increased 13%, right in line with store count growth from 846 last year to 954 this year. Gross margin improved 20 basis points, with initial price improvements offsetting slightly higher markdowns. Store level expense was up 220 basis points. That's a lot, but the negative leverage is not surprising given lower comp sales. Corporate expense was favorable to prior year as Abercrombie tightens its belt. As a result, EPS only grew 5% for the quarter.
Given the negative comps you would expect inventories to be on the high side at quarter's end, and they were -- up 6% on a per-store basis. This is a little worrisome, but with three good summer selling months remaining, there's time left to sell through the seasonal assortment (if comp sales get back on track).
The Foolish bottom line
The stock price has also been treading water since last fall, as investors try to figure out whether Abercrombie is out in front of their fickle customers, or is missing the wave. The Motley Fool CAPS community is leaning toward the latter. Based on recent results, I'm inclined to agree.
For more on the teen rag saga, check out:
American Eagle and Gap are Motley Fool Stock Advisor selections. Gap is also an Inside Value pick and Limited is an Income Investor recommendation.
Fool contributor Timothy M. Otte surveys the retail scene from Dallas and welcomes comments on his articles. He doesn't own shares of any companies mentioned in this article.
