The apparel retail industry has not been in the best of health as a result of an uncertain employment scenario and an economy that is still in hibernation mode. In such circumstances, Urban Outfitters (NASDAQ:URBN) came up with strong third-quarter results. This is in stark contrast to other apparel retailers like American Eagle Outfitters (NYSE:AEO) and Abercrombie & Fitch (NYSE:ANF), which continued their run of dismal results.
During the estimate-beating third quarter, the sturdy performance of Urban Outfitters' Anthropologie and Free People brands, in addition to the continued robust direct-to-consumer, or DTC, growth, fueled the rise in consolidated same-store sales, or comps. In addition, Urban also opened nine new stores during the quarter. On the back of strong comps and nine new store openings, sales for the quarter increased 12% versus the comparable quarter a year ago, to a third-quarter record of $774 million .
Gross profit expanded 11 basis points to 37.7% as a result of reduction in merchandise markdowns and improved initial merchandise margins at the Anthropologie and Free People brands, but was partly offset by an increase in merchandise markdowns at the Urban Outfitters brand in North America. Gross profit climbed 12% and net profit came in at $70 million, or $0.47 per share. This represented a 17.5% year over year gain on earnings per share .
Urban's omni-channel platform was launched in the third-quarter last year, and in one year it has seen good response from consumers as the company has added more products and categories. The DTC initiatives remain at the core of the growth plans of Urban. During the quarter, DTC grew on the back of an improved conversion rate, a higher average order value, and an increase in visitors.
The company is confident about sustaining its growth momentum going forward, driven by new store openings, growth in DTC sales, and growing wholesale operations. As per details in the regulatory filings of the company, retail segment comps were up in the mid-single digits so far in the fourth quarter, and this indeed is good news for Urban Outfitters amid a challenging holiday season.
Better than peers
In stark contrast, American Eagle's comps have been declining, and for the fourth quarter, management has projected a mid single-digit decline. The comps for the third-quarter saw a decline of 5%, and this was after a 7% decline in the second quarter. The decline in comps would have been higher, but the AEO Direct channel registered an increase of 17 % and thus arrested further declines.
The performance of AEO Direct reflects that investments in omni-channel initiatives, which include improving the online shopping experience, are working in favor of the company. For example, revenue from the newly launched mobile app more than doubled compared to last year.
Going forward, American Eagle is betting on continued investments in its omni-channel initiatives, including e-commerce. As it is, the company has witnessed a fairly significant shift to online shopping, with e-commerce sales reaching record volumes on both Thanksgiving and Cyber Monday, when sales were 45% above the previous peak levels.
In addition, American Eagle is also betting on international expansions, both company-owned as well as licensed, and is shuttering under-performing stores. The company is projecting to end 2014 with at least 100 licensed stores in over 20 countries , with Japan being the strongest license market. These international expansions, however, aren't something that would happen overnight, so the positive impact of these maneuvers would take time to reflect on the financial performance. Hence, investors would need to be patient.
Abercrombie is also making some moves in order to wriggle out of a tight corner that it finds itself in. One such move is giving up the stance of "fat shaming" by its CEO, which landed him and the company in trouble and led to a fall out with its target customers -- the teens. The company would now be selling XL- and XXL-sized clothes for women . As a result of this decision alone, Abercrombie would be addressing a larger market and can hope to see some improvement in sales, which declined 11.7% to $1.03 billion in the third-quarter.
On the bright side, despite the challenging retail environment for teen apparel, the company witnessed continued growth of its DTC business, which was up across all regions in the third quarter, with Asia being the star performer. In addition, the company's international expansion plans are also shaping up well. In China, comps were up around 40% till the third-quarter results.
Urban Outfitters has been the best performer among its peers. The company is more reliable as far as comps growth is concerned as its peers have seen sharp declines in sales. While American Eagle and Abercrombie are aiming for a turnaround, Urban Outfitters is looking to carry its momentum forward by strengthening its sales. Hence, investors looking for a good buy in the apparel retail industry should definitely consider Urban Outfitters for their portfolio.