The Appeal of Apparel Retailers: ANN, Gap, and Nordstrom

In mid-December, the U.S. Department of Commerce reported that retail and food-service sales for November grew 0.7% from October -- the largest increase in five months -- and were up an impressive 4.7% compared with the same period last year. Today we look at three major clothing retailers -- ANN (NYSE: ANN  ) , Gap (NYSE: GPS  ) , and Nordstrom (NYSE: JWN  ) -- that are striving to take advantage of this improved but not exactly sublime retail environment.

Earnings growth is always in fashion
ANN is a leader in women's specialty-retail fashion under the brands Ann Taylor and LOFT.

For the third quarter, the company reported a 7% increase in net sales compared to the same quarter last year. Comparable-store sales increased 3.7% year over year, a particularly strong performance given that comp-store sales had risen 5.5% year over year in the third quarter of last year.

The challenging competitive environment required the company to boost revenue with promotional activity, negatively affecting the gross margin percentage, which dropped to 55.7% from the 57.9% achieved is last year's third quarter.

Chief executive officer Kay Krill cited "disciplined management of expenses" as one of the keys to the company's successful third quarter, which was evidenced by the 190-basis-point improvement in selling, general, and administrative expenses as a percentage of sales.  

The net affect of increased sales, a lower gross margin percentage, and tight control of costs led to 5.2% growth in operating income.

Aiming to widen the gap with its competitors -- globally
On the surface, Gap's third-quarter comparable-store-sales increase of a mere 1% looks puny in comparison to the 6% increase seen in last year's third quarter. But as the recession released its icy grip on retailers last year, companies saw some unusually impressive comp-store sales gains because sales had been so lackluster in the prior year.

In looking at Gap -- owner of the The Gap, Banana Republic and Old Navy brands -- an important takeaway is what CEO Glenn Murphy stated in the company's earnings release: "This quarter marks our seventh consecutive quarter of positive comp sales growth."

Other financial metrics were favorable as well for Gap. Net sales for the company grew nearly 3% overall compared to last year's third quarter. Online sales grew by 20%, showing the company's strategic commitment to being an omni-channel retailer. This will drive both future growth and the ability to maintain a competitive advantage by building customer loyalty.

Competitive pressures showed up in a decrease in the gross profit margin percentage for the quarter from 41.2% to 40%, but a more than 200-basis-points reduction in operating expenses as a percentage of sales enabled the company to achieve a 100-basis-point improvement in operating margin, to 14.5%.

Gap emphasizes its global development strategy. The company, for example, sees major growth opportunities for its brands in Asia. During the quarter, it opened 65 company-operated stores, 25 of which are in Asia. 

Technology as a fashion accessory
Nordstrom aims to be a technology leader in retail as well as a fashion leader. The company has created a multi-channel approach to retailing with an upscale brand, Nordstrom stores; a moderate price brand, Rack; an online upscale channel, nordstrom.com; and an online moderate-price channel, HauteLook.

In its Dec. 13 investor presentation, the company states that by encouraging customers to shop across channels, they may spend three to four times as much as a single-channel customer would. Management goes on to say it is possible within the next five years that half of its sales will come from the Rack brand and online channels.

By making investments in technology and expanding the selection of online merchandise, the company increased direct net sales 23% in the third quarter compared to the same quarter last year -- when direct sales also had a terrific increase, 38%.

As with Gap, same-store-sales comparisons were not robust because last year's third quarter showed such an outstanding increase. Nordstrom's same-store sales actually declined 0.7%, whereas in last year's third quarter they had risen 11.2%. Rack same-store sales increased 3.7% after recording an 8.1% increase in 2012's third quarter.

Net sales overall were up nearly 3%, as the number of Rack stores increased by 19 year over year. The number of Nordstrom stores was unchanged.

The gross profit margin decreased 41 basis points, and SG&A expenses as a percentage of sales rose 65 basis points due partially to planned investments in technology and fulfillment.

The result was a $24 million, or 8.7%, decrease in earnings before interest and taxes. Management said about $20 million of this negative variance was due to a shift in the timing of the company's big anniversary sale event.

What we learned
I like the way ANN helps women build a stylish wardrobe appropriate for both work and leisure activities at two different price points. Ann Taylor's niche is the more upscale customer and LOFT is geared to the value-conscious consumer.

Serving both types of customers allows the company to greatly expand its potential market. Nordstrom accomplishes this same goal with its Nordstrom- and Rack- brand concepts.

Gap offers clothing for a wide range of demographics -- men, women, children, and even babies. Its international development focus is wise given how well known and therefore exportable its brands are.

Nordstrom is willing to make significant investments in technology now to capture greater customer attention later. The company even has a Nordstrom Innovation Lab to generate ideas that will lead to the company being a leader in retailing technology.

ANN's CEO believes the company is on track to achieving record full-year earnings per share. Given the still challenging retail environment -- with more customers willing to spend but clearly seeking bargains -- this excellent earnings performance makes it my favorite of the three.

 

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