Specialty Retail and the Importance of Direct Sales

 |  Includes: AEO, ANF, GPS, JCG, URBN, XRT
by: Trefis

Internet and catalog sales are becoming increasingly important for some of the major specialty retailers covered by Trefis. Retailers realize higher profit margins on such direct-to-consumer sales than on merchandise sold in physical stores.

Internet and catalog sales constitute about 17% of the $34 Trefis stock price estimate for Gap Stores (NYSE:GPS). They constitute 32% of our $42 price estimate for J.Crew (JCG), 24% of our $40 estimate for Urban Outfitters (NASDAQ:URBN), and 26% of our $26 American Eagle estimate (NYSE:AEO). Our analysis follows below.

Gap leads the pack

In dollar terms, Gap is the leading specialty retailer in our coverage group when it comes to Internet sales, which it combines with franchise sales for reporting purposes. Gap’s Internet and franchise sales grew from $0.6 billion in 2005 to $1.3 billion in 2009.

We expect sales through these channels to grow steadily in coming years, nearing $2.5 billion by the end of the Trefis forecast period. You can drag the trend-line in the chart below to create your own Internet and franchise sales forecast for Gap and see how it impacts the company’s estimated stock price.

Torrid growth for American Eagle

American Eagle has posted the highest Internet and catalog revenue growth rates in its class. American Eagle’s direct-to-consumer sales increased from $120 million in 2005 to $350 million in 2009, an annual growth rate of 30%.

Next comes Urban Outfittters, whose Internet and catalog sales grew at an annual rate of 25% over the same period, from $130 million in 2005 to $320 million in 2009. Gap and Abercrombie & Fitch (NYSE:ANF) both posted 20% annual growth rates in direct-to-consumer sales, followed by J.Crew at around 15%.

The next two charts show our Internet and catalog sales forecasts for American Eagle and Urban Outfitters, respectively. You can drag the trend-lines to create your own forecasts and stock price estimates for both companies.

J.Crew leads in proportional direct sales

Among the specialty retailers that we cover, J. Crew reports the highest percentage contribution of Internet and catalog revenues to total revenues. J. Crew’s direct-to-consumer revenues grew from $280 million in 2005 to $470 million in 2009, or 30% of total revenues.

By comparison, Urban Outfitters derives about 18% of total revenues from Internet and catalog sales, versus 8% to 12% at Gap, Abercrombie & Fitch and American Eagle.

Internet and catalog sales are proportionally more important for J.Crew because it started out as a direct-to-consumer player and only later entered the brick-and-mortar retail business. Its competitors all started as brick-and-mortar retailers and and then diversified into the direct-to-consumer business.

You can drag the trend-line in the chart below to create your own Internet and catalog sales forecast for J. Crew and see how it impacts the company’s estimated share value.


Going forward, we expect Internet and catalog sales to become increasingly important for the specialty retailers that we cover. We expect established direct-to-consumer players like Gap and J.Crew to post Internet and catalog revenue growth rates of 7% to 10% during the Trefis forecast period. We expect direct-to-consumer growth rates of around 15% for newer entrants like American Eagle and Urban Outfitters.

Emerging trends

Social networking: Specialty retailers are increasingly crafting online marketing campaigns designed to capture traffic from popular social networking services like Facebook and Twitter. The campaigns are working: In 2009, the number of unique visitors to the e-commerce sites of specialty retailers that we cover increased at a monthly rate of 5% to 10%.

Operational efficiencies: Due to increasing competition in in the direct-to-consumer segment, retailers must continually accelerate their turnaround times, broaden their inventories and improve their customers service. As a result, most have been upgraded the technology and back-office systems that support their direct-to-consumer sales operations.

For example, Urban Outfitters has rolled out interactive shopping tools from Allurent in an effort to provide a better online retail experience for its customers.

Disclosure: No positions