The U.S. economy is going through a strange phase where people have become choosy about what they spend on. On one hand, they are splurging on electronic gadgets, smartphones, and tablets, while on the other hand they are cutting down on apparel . This has brought pain to most of the specialty retailers, many of which are witnessing declining demand and lowered sales despite the fact that the peak shopping season is in progress.
A good example here is Abercrombie & Fitch (NYSE:ANF), a specialty apparel retailer that is going through a difficult phase leading to lackluster results.
Revenue dipped 12% to $1.03 billion due to low demand and weaker sales as customers look for cheaper options to fulfill their apparel needs. Lower customer traffic led to a fall of 14% in same-store sales.
Despite cost-cutting measures, adjusted earnings plunged significantly to $0.52 per share. The retailer was hit hard by its decision to close its Gilly Hicks stores, Abercrombie's intimate apparel brand. Although all Gilly Hicks stores will be closed, the apparel will be available on its website and the Hollister stores.
Losing against peers
Abercrombie's performance has been disheartening compared to peers such as The Gap (NYSE:GPS) and Urban Outfitters (NASDAQ:URBN). Its stock price has declined considerably, as reflected in the chart below:
Clearly, Gap has outperformed the others with 22.4% appreciation in its stock price. Although it has been facing the same problem of lower demand as customers spend less on fashion, the company seems to be bucking the trend of poor results through its strategies. It has brightened its stores to make them more attractive, made collaborations with new designers, and brought innovation to its products, which lured customers to its stores .
Its top line and bottom line grew 3% and 14% respectively in its recently reported quarter, topping analysts' estimates. Given the demand for its products, the retailer opened 65 new stores during the quarter and plans to add 160 stores during the fiscal year . In fact, the company was confident about its previously announced outlook and stuck to the same.
Both Abercrombie and Gap witnessed sharp increases in their online sales, which has been an area of focus. This segment can help the retailers boost their revenue.
Urban Outfitters performed well with comparable store sales growth of 7% and a revenue increase of 11.7% over last year. The specialty retailer's retail and wholesale segments both grew well. In fact, among the three players, Urban Outfitters is the only one that managed to widen its margins by 11 basis points. After nine new store openings during the period, the company plans to add another 10 in the current quarter . Although Urban did not provide much of a return over the last year, the company is growing well and should outperform the others in the months to come.
Final Foolish thoughts
Abercrombie's peers are outpacing the retailer by offering better products and managing their inventories well. Meanwhile, Abercrombie has been a laggard on all fronts. The specialty retailer is restructuring its business, closing stores, and expanding into bigger apparel sizes to grow its business.
It is difficult to say to what extent these moves will help the fashion retailer stage a comeback. Clearly, one should stay away from this company for now. If specialty retail is an investment criterion, both Gap and Urban Outfitters can be considered worthy investments.
Pratik Thacker has no position in any stocks mentioned. The Motley Fool recommends Urban Outfitters. 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.