Three teen retailers that are no strangers to controversy reported their quarterly results this week. Let's take a look at how Abercrombie & Fitch (NYSE: ANF ) , American Apparel (NYSE: APP ) , and Urban Outfitters (Nasdaq: URBN ) have fared in the current economic climate.
Abercrombie & Fitch
Abercrombie & Fitch probably elicited some blushes with the Web site for its new Gilly Hicks concept; the retailer's historically well-known for such controversy. But if sex sells, apparently fewer people are buying than before.
Abercrombie's second-quarter net income dipped 4% to $77.8 million, or $0.87 per share. Revenue increased 5% to $845.8 million, and total same-store sales fell 4%. Positive same-store sales at the original Abercrombie & Fitch concept weren't enough to offset the comps disintegration at some of its other concepts.
Hollister's comps fell 9%, and Ruehl's comps plunged 22%. Abercrombie's kids' concept, abercrombie, experienced an 11% drop in same-store sales. Abercrombie also recently lost a key executive, fueling some recent bearishness on the retailer.
Years ago, I wished that American Apparel were a publicly traded company. For such an interesting, high-growth retailer, it seemed a shame not to have the option to invest in it. Of course, given its post-IPO controversy, some might wish for a little less public exposure. It's not just the company's sexy marketing, but also the, uh, colorful stories regarding CEO Dov Charney's own office escapades.
Regardless, American Apparel's second-quarter results did reveal admirable growth. Net income increased 42% to $6.8 million; however, earnings per share were flat at $0.10 per share as shares outstanding have burgeoned on a year-over-year basis. Revenue increased 38.9% to $133 million, and quarterly same-store sales increased by a very impressive 23%.
The conference call revealed that American Apparel has been able to use a recent retail casualty to its advantage. It acquired several mall leases from Sharper Image's bankruptcy sale, getting several prime mall locations, including some locked in at rents below market value.
American Apparel upped its store opening plan to 50 to 55 stores this year, from 40 to 45. Despite the economy's difficulties -- and even as other retailers shutter stores or slow down expansion -- American Apparel continues to grow.
Urban Outfitters has also managed to outrage shoppers with edgy merchandise at times, but it's been pretty quiet on that front lately. That doesn't seem to be hurting its performance, though, despite the difficult economic climate.
Second-quarter net income increased 78.8% to $57 million, or $0.33 per share. In addition, Urban Outfitters improved gross profit to 41.1% of sales, from 37.3% of sales.
Revenue rose 30% to $454.3 million, and same-store sales leapt 13% in the quarter. All three of its concepts showed solid gains in comps; the core Urban Outfitters concept's comps increased 19%, Anthropologie's increased 7%, and Free People increased by 10%.
Do I get a chaperone with this stock?
I've long considered Urban Outfitters one of the best businesses in retail. (Hey, Jim Cramer loves it, too.) Although its forward price-to-earnings ratio of 23 sounds pricey, I still believe it's well-positioned to create growth for years to come.
On the other hand, I've never been a fan of Abercrombie & Fitch. For all the controversial sexiness in its branding, I always found its merchandise fairly unexceptional. I see few competitive advantages to distinguish its concepts from teen-targeting rivals like American Eagle Outfitters (NYSE: AEO ) , Zumiez (Nasdaq: ZUMZ ) , Aeropostale (NYSE: ARO ) , and J. Crew (NYSE: JCG ) . However, I can see why some investors might find Abercrombie's forward price-to-earnings ratio of just 9 particularly alluring.
Sexy ads may offer a slim competitive moat at best, and American Apparel is best known for simple cotton T-shirts, although it is expanding its merchandise offerings. However, the fact that American Apparel -- get this -- actually does make its clothing in America is one of my favorite elements. Being able to boast a well-paid, sweatshop-free labor force is great for the brand.
The legal sections of its regulatory filings are long, and Charney has himself been the subject of several sexual harassment suits. The media has circulated plenty of stories of Charney's inappropriate antics, making such behavior a major risk for investors. While he may be a visionary for launching this business, visionaries can sometimes be major loose cannons, too. The company's significant debt is yet another risk. And in a final weird touch, Woody Allen has even sued American Apparel for more than $10 million for unauthorized use of his image in a billboard.
American Apparel's a compelling, rebellious stock idea in some ways, but I view it as the riskiest of this bunch. Given its 20% stock pop today, I'd rather see a much cheaper price for that amount of risk.