Which Retailer Is The "King of Hipsters?"

Yes, the clothes are overpriced. Yes, we're still in the midst of a recession. And, yes, the bohemian trend may not last forever. Yet, surprisingly, Urban Outfitters (Nasdaq: URBN  ) has navigated an amazing turnaround in the past nine months. Will it continue? Maybe...maybe not. Francesca's Collection (Nasdaq: FRAN  ) has opened new stores at an alarming pace and may unseat the "hipster" king.

Take your father's fashion advice
Few grandpas know fashion as well as 64-year old, Urban Outfitters' co-founder and Chairman Richard Hayne. Since returning to the CEO seat in January, he has shaken-up the executive suite to beat back copycats. First, he consolidated the CFO and Chief Accounting Officer responsibilities to streamline the company's financial focus. Second, he convinced Ted Marlow to return and lead the company's namesake brand (a position Marlow held from 2001-2010, when the stock returned over 2,000%). So far, they have consistently and dramatically improved both gross and profit margins over the past year.

 

Jul-12

Apr-12

Jan-12

Oct-11

Gross Margin

41.92%

40.53%

33.86%

39.92%

Net Margin

9.06%

5.97%

5.37%

8.31%

Source: URBN 10-Qs from 2012 and 2011.

Part of Urban Outfitters' recent success is owed to management's investments into newer brand concepts. Next year, it plans to open 50 new stores, of which 16 will be Anthropologie stores, and 15 Free People stores. Meanwhile, it is also testing out a wedding and gardening concept. Currently, Urban combined store count stands at 456.

...Or maybe not.
Despite its recent success, the looming concern is whether Urban Outfitters' management can successfully expand while keeping its style relevant. Though Gap (NYSE: GPS  ) soared in the 1990s, thanks to its classic denim and khakis, the company is out-of-fashion with most young adults. Similarly, Abercrombie (NYSE: ANF  ) and American Eagle (NYSE: AEO  ) were the "popular kids" attire for much of the 2000s. Yet, I can't remember the last time I, or my twenty-something sisters, have shopped at any of those stores!

Now, you may think that Urban Outfitter will remain largely uncontested and the king of today's trends. That may be true, but Francesca's Collection (Nasdaq: FRAN  ) may soon overtake Urban. Simply look at its gross and profit margins:

 

Jul-12

Apr-12

Jan-12

Oct-11

Gross Margin

57.23%

55.81%

54.89%

54.50%

Net Margin

16.57%

14.25%

13.54%

9.48%

Source: FRAN 10-Qs from 2012 and 2011.

Francesca's refreshing store concept -- small and intimate "boutiques" -- is driving these high margins even higher. Because no two boutiques carry the exact same merchandise, Francesca has trained its shoppers to visit each of its 357 stores to cure their boredom and satisfy their curiosity. After a few visits, Francesca's customers quickly get the underlying message: "Buy Now: That Shirt will be gone later."

When considering metrics that are important to retailers, Francesca's ability to play into our sense of discovery and urgency further illustrates its strong competitive advantage. Not only does Francesca sell out of its inventory 30 days faster than Urban, but the boutique company has accelerated same-store sales growth from 5% to 21% year over year this past quarter. Urban's same-store growth, however, has remained steady at 10%.

And management? Well, Francesca's executive team is clearly as committed as Urban's. Though CEO and co-founder John Demeritt will be stepping down in January, his replacement is dedicated and experienced. Neill Davis has been with the company for five years, and spent 15 years building Men's Warehouse into a national brand. Furthermore, inside ownership currently stands at 21%, similar to Urban's 25%.

Who's the "hippest" of them all?
When analyzing each company's P/E ratio, Francesca's Collection (40.03) does look more expensive than Urban Outfitters (30.59). So which company should you buy and hold? Well, depending upon how risky you feel, I think both Urban Outfitters and Francesca's Collection may both fit well into your portfolio.

It's clear that consumers like Francesca's fresh retailing concept. And, its management has the experience to manage its phenomenal store and same-store sales growth.

At the same time, Urban Outfitters is resurgent. Richard Hayne is a visionary, knows how to command the company, and takes risks on newer ventures. Though the company may seem to lag behind Francesca's, its margins and financial ratios are impressive compared to the rest of the industry. 

Whatever your decision, retail is an incredibly competitive space. Stay up-to-date on the competition with The Motley Fool's 3 Companies Ready to Rule Retail. Click here now.

Fool contributor Kevin Chen has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (2) | Recommend This Article (2)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 19, 2012, at 4:57 AM, ptqrs wrote:

    URBN had three stock splits (2 for 1) during 2001-2010. If I haven't mistaken that yields more than 12,000%.

  • Report this Comment On October 19, 2012, at 11:09 AM, TMFKang wrote:

    Hi ptqrs,

    You are right. Unfortunately, past performance is not an indicator of future performance.

    Thought one cannot compare this to the tech sector, one can say that for every Steve Jobs, there's another Jerry Yang. That is, returning founder-CEOs are never a sure thing. Even Howard Schultz of Starbucks realized this (which is why he hired consultants to help with his transition back in 2008.

    Best,

    TMFKang

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