The economic environment is being tough on most retailers, but well-run companies focused on the high-end segment of the pricing spectrum are clearly doing much better than the rest. Companies like Williams-Sonoma (WSM 1.24%), Michael Kors (KORS 2.34%) and Urban Outfitters (URBN +0.87%) are generating growth for shareholders by delivering the right products to their affluent clienteles.
Double tailwinds for Williams-Sonoma
Williams-Sonoma is benefiting from two different tailwinds at the same time, the real estate recovery is generating growing demand in the home furnishing business, and high-end retailers are doing much better than companies targeting middle or low-income consumers.
The company reported a healthy increase of 11.3% in third quarter revenue to $1.052 billion from $945 million in the third quarter of 2012 on the back of an 8.2% growth rate in comparable brand revenue for the quarter.
Even if the company´s flagship Williams-Sonoma brand grew by a moderate 1.4% on a comparable brand basis, other brands like Pottery Barn, Pottery Barn Kids, West Elm and PBteen were much stronger during the period with increases of 8.4%, 3.9%, 22.2% and 16.7% respectively. Direct to consumer net revenues increased by 14.5% during the quarter and it now represents a 49% of total company revenues.
Due to rising profit margins and a reduced share count via buybacks, diluted earnings per share increased by 18.4% during the quarter, and management raised sales and earnings guidance for the rest of the year.
CEO Laura Alber sounded quite optimistic regarding prospects for the key holiday quarter:
"We believe we are well-positioned heading into the holiday season and will continue to execute our key strategies to deliver an exceptional experience for our customers."
Michael Kors is trendy
Michael Kors is one of the most successful growth stories in high-end fashion over the past few years. The company operates in the affordable luxury segment, selling handbags, shoes, watches, jewelry, and accessories through three different channels: retail stores, wholesale, and licensing agreements.
The business is truly firing on all cylinders; Kors delivered a blowout earnings report for the last quarter with revenues growing by 38.9% and earnings per share increasing by a whopping 44.9% to $0.71, this was comfortably above the $0.68 per share estimated on average by Wall Street analysts.
Performance was strong across the board for this aspirational brand: Retail net sales jumped 46.8% driven by a 22.9% increase in comparable store sales and 83 net new store openings in the quarter. Wholesale net sales increased 29.9% to $351.9 million and licensing revenue grew by 65.4% to $32.9 million. Europe is looking like a particularly promising opportunity for Michael Kors, sales in the old continent increased by 101% in the last quarter fueled by comparable store sales growth of 45%.
Management raised earnings and sales guidance, the company is now expecting total revenue for 2014 to be in the range of $845 million to $855 million based on an expected increase of between 15% and 20% in comparable store sales for the year. Michael Kors plans to open approximately 100 retail locations in fiscal 2014, including 54 in North America, 40 in Europe, and six in Japan.
Urban Outfitters is young and growing
Apparel retailers targeting teenagers and young adults are having a tough time as most of their customers are keeping their wallets closed lately. But Urban Outfitters is doing materially better than most competitors, especially when it comes to its higher-end brands Anthropologie and Free People.
Total sales for the third quarter of fiscal 2014 increased to a record $774 million or 12% over the same quarter last year. Comparable retail segment sales increased by 7% and sales at the wholesale segment rose by a healthy 12%.
When looking at the company's different brands, performance was quite dissimilar though. Free People and Anthropologie were remarkably strong with growth rates of 30% and 13% respectively in comparable retail segment sales. The more affordable Urban Outfitters brand, on the other hand, delivered a decrease of 1% in comparable retail revenue.
This difference in performance should not come as a big surprise considering current industry trends, companies and brands targeting the affluent are generally doing better than those focused on lower end consumers.
All in all, Urban Outfitters is still doing quite well, gross profit margin increased by 11 basis points versus the year-before quarter and the company delivered earnings per diluted share of $0.47, an increase of 17.5% versus $0.40 per share in the previous year and better than the $0.45 estimated on average by Wall Street analysts.
Even if management is being cautions due to the "increasingly promotional holiday environment", Urban Outfitters looks well positioned to continue outperforming its peers based on resilient demand for its Anthropologie and Free People brands.
Bottom line
Retail is a challenging industry, especially in the current economic scenario. On the other hand, companies like Williams-Sonoma, Michael Kors and Urban Outfitters are generating substantial growth for shareholders by delivering the right merchandise to an affluent customer base. Well managed companies in the high end of the pricing spectrum are the place to be this shopping season.
