Now that we're into July, it's a good time to check up on how the year is shaping up for retailers. Spring has sprung. The major early season holidays are over. We're into the dog days of summer when retailers typically clear out early season merchandise and prepare for fall and the holidays, where the real action is.
Today we'll look at fashion apparel retailers. This is a group of companies that have built powerful brands over the years, but several of them are struggling mightily of late. Below is a chart that summarizes key financial metrics for the year so far.
|
YTD Sales |
YTD Sales |
EPS Growth |
YTD Stock |
TTM PE | |
|
Ann Taylor (NYSE:ANN) |
2.4% |
(4.7%) |
(13.2%) |
2.5% |
18.5x |
|
Gap (NYSE:GPS) |
1% |
(4%) |
(21.5%) |
(3.2%) |
21.5x |
|
Limited (NYSE:LTD) |
11% |
3% |
(48%) |
(1.2%) |
17.6x |
|
Abercrombie & Fitch
|
15% |
(3%) |
4.8% |
(6.5%) |
16.1x |
|
Aeropostale |
11.6% |
1.9% |
80% |
18.6% |
20.2x |
Ann Taylor
Ann Taylor experienced a resurgence in 2006. Comp sales grew 2.8%, earnings surged forward 75%, and inventory turns of 5.0 times were the highest in five years. To date, 2007 has not been kind to Ann Taylor, with comp sales declining 4.7% through June. The biggest problem has been its LOFT stores, where comp sales are down approximately 10% for five months. I should note that the LOFT stores ran high-single-digit comps in the first five months last year, so they're up against some stiff comparisons.
In its June sales release, Ann Taylor affirmed full-year EPS guidance of $2.15-$2.25. This will not be easy to achieve, given YTD results. The guidance is based on low-single-digit comp sales, flat margins, and lower inventory per square foot. Ms. Taylor is well short of each of these metrics so far. Comp sales are down nearly 5%. Inventory PSF was up 9% at the end of Q1, and gross margins are off 300 basis points. With soft sales in May and June, the inventory pipeline is likely to still be full, meaning higher markdowns that will put pressure on margins. Investors are anticipating further news on the company's plans to launch a new concept in 2008.
Gap
The troubles at Gap continue. After two years of comparables sales declines, the 2007 YTD trend is showing no signs of turning. All four segments are experiencing sluggish sales results. Year-to-date comp sales results are Gap North America down 6%, Old Navy North America down 5%, International down 2%, and Banana Republic up 1%. Banana Republic is showing signs of life, with two consecutive months of positive comps.
A glance at the GAP 2006 annual report shows that the company recognizes it has problems and is addressing them head-on. Three priorities for 2007 are to 1) better understand the customer and deliver the right product, 2) rebuild management strength, and 3) reshape the organization to eliminate bureaucracy and stimulate innovation. The investment community appears to believe the company is on the right track, as the stock still commands a premium multiple. But these kind of major changes take time. An interesting step down the road to understanding customers better is the recently announced Gap branded credit card.
Limited
Big changes are also on the menu at Limited Brands. A 75% stake in the Express brand has been sold to Golden Gate Capital. The company has also signed an agreement to transfer 75% ownership in the Limited Stores brand to Sun Capital Partners. Both brands will continue to be headquartered in Columbus, Ohio. Share repurchases have been kicked up to $1 billion, to be financed through new debt, similar to what Home Depot (NYSE:HD) recently announced. Corporate headcount will be reduced 10% (a cut expected to save $100 million in 2008).
The strategic intent is to move the company from a portfolio of brands and businesses to a company tightly focused in two segments: intimate apparel and personal care. This new, smaller entity will be centered on the Victoria Secret and Bath & Body Works brands, where the company believes future growth prospects are the best. Year to date, Victoria Secret is running 4% higher comp sales, while Bath & Body Works comps are flat. Check out a recent review of results for the company from Billy Fisher.
Abercrombie & Fitch
Abercrombie & Fitch rode out the first quarter with comp sales down 4%, margins slightly improved, and earnings per share edging higher by 5%. Comp sales continued the downward trend in May, but turned positive by 2% during June. Inventories at the end of the first quarter were slightly elevated, up 6% on a per-store basis. Based on May-June sales results, inventories probably are still a bit higher than the company would like, but not severely so.
The big news for the company is a global expansion effort in Europe. The company is eyeing Italy, France, Spain, Denmark, Germany, and Sweden, in addition to growing its presence in the U.K. This sounds like biting off a lot all at once. Each of these markets has unique demographics, consumer tastes, and competitive sets. The company is certainly hitting the right fashion note with U.S. consumers, but time will tell whether Abercrombie appeals to the European sense of style.
Aeropostale
Aeropostale knocked the cover off the ball during the first quarter. Comp sales advanced forward 2.5%, margins improved a whopping 360 basis points, and inventory was actually lower than the prior year. EPS shot forward 80% compared to the prior year. The company admitted that these results significantly exceeded their expectations, and credited the gains to inventory management initiatives and trend-right assortments.
Sales growth has leveled off the past few months. May comps were up 1.9%, with June comps advancing only 0.2%. The June sales release speaks to careful management of inventory clearance and a solid position heading into the back-to-school season.
Summary
Fashion retail is a fickle business. All the elements must come together in the right combination -- merchandising, advertising, and the right shopping environment -- plus you need to hit two seasons correctly every year. Perfection is impossible, and momentum is critical. The stakes are high. When these companies hit the mark, they make lots of money. When they miss, investors can be cruel.
Abercrombie and Aeropostale are clearly on top of their game at this point in 2007. With all these companies sporting valuations in a similar range (based on trailing-12-month PE), ANF and ARO are my odds-on favorites to be winners in the fall. Gap and Limited are in the midst of turnaround efforts. You either believe the new directions will work, or you don't. The CAPS community is doubtful on Gap, but takes a more favorable view of Limited. Ann Taylor is on an improving trend, but it still isn't hitting on all cylinders.
For more news on fashion retailers, check out:
Gap is both an Inside Value and a Stock Advisor selection. Limited Brands is a Motley Fool Income Investor recommendation. Home Depot is an Inside Value pick.
Fool contributor Timothy M. Otte surveys the retail scene from Dallas. He welcomes comments on his articles, but doesn't own shares of any companies mentioned in this article. The Fool's disclosure policy owns the catwalk.
