As a little shopping bug gnawed away at my wallet last weekend, I decided to dig in to a few of my favorite clothing retailers' annual reports when I got home and see what excitement lay hidden within.
I'm not sure what I was expecting when I started delving into my stack of 10-Ks. I think I had imagined gripping psychological twists of brand power and innovation funded by the stack of cash missing from my bank account.
Unfortunately, all I found was a really boring way to spend a weekend.
All of these things are just like the others
I mean, it all started out well enough. The Gap (NYSE: GPS) has been expanding internationally? Neat! Oh, but so has American Eagle (NYSE: AEO), and both companies are also focusing on integrating mobile commerce, the new phenomenon of consumers shopping via cellphone, both to help them decide what they want and to make the actual transactions (this doesn't include tablets).
While mobile commerce may spur sales for these companies, it isn't indicative of a sustainable competitive advantage since it can be easily replicated by any competitor.
Moving on, I read that both Chico's FAS (NYSE: CHS) and Ann Taylor (NYSE: ANN) are opening up more outlet stores and focusing on e-commerce (online sales made through computers and tablets -- very popular in the U.S.). Those are smart strategies to keep up with new consumer spending habits, but again, both strategies are easily replicated.
Well, Ann Taylor also redesigned its stores' interiors to stay fresh and exciting!
Ah, but so did Gap...
And so it went on, an endless circle of monotony.
Well, how were the numbers?
Gap, Ann Taylor, and Chico's all boosted their earnings per share last year by purchasing, or authorizing the purchase of, common stock. This looked promising for the industry as a whole, and hey, both Ann Taylor and Chico's had great timing, snagging back stock at low prices. A glimmer of hope!
Next I moved on to the comparable store sales to see if any of these brands was seeing more strength than others. Unfortunately, I found nothing to write home about. Most of the numbers are respectable but within range of one another. The standout here is Gap, finishing with negative same-store sales growth.
|
Company |
Q3 Comparable Store Sales |
|---|---|
| Ann Taylor | 5.5% |
| American Eagle | 5.0% |
| Chico's | 3.1% |
| Gap | (5.0%) |
Source: Companies' quarterly press releases.
Finally, in a Foolish effort to be thorough, I took a look at how the stock of each company had performed over the last year when compared to the S&P 500. Not terribly inspiring:
S&P 500 Stock Chart by YCharts
Leaving empty-handed
And that's how I spent my weekend, Fools. I wanted desperately to find the company with a strong competitive advantage among these companies but could not identify one. With these companies, innovation overlaps and easily mimicked strategies create a highly competitive landscape with little distinction between this group.
However
Innovation overlaps between companies, and brand power ends up being volatile based on trends in the fashion industry. Lululemon (Nasdaq: LULU), for example, blows all of the above companies off the charts. It's experienced monumental growth over the last few years and currently enjoys pretty strong brand power. But how long will yoga and loungewear be popular? And what's to stop another company from coming in and doing the exact same thing?
My takeaway from all of this, though, is a true understanding of just how competitive this industry is from company to company. No single company can get the sustainable competitive advantage necessary to really take off.
Add to that the rise in cotton and fuel prices that hit these companies hard over the summer, and I just don't feel safe putting my money there for the long term.
Outside of clothiers in the sector, though, the retail industry has plenty to offer. If you want to check out a more promising retail play with a company poised for explosive global growth, then click here to read a special free report about The Motley Fool's Top Stock for 2012.
