Urban, Abercrombie: Understanding December Retail Sales Data

by: Anthony Davian

So as you probably are aware, a bunch of retailers released their December sales data and comps yesterday. Generally, most companies’ sales sucked less than analysts’ consensus—although beating year-over-year comps for December 2008 is a pretty low bar (like being the most beautiful person at bingo night at the retirement home). Two companies in particular that were of interest to me yesterday were Urban Outfitters (NASDAQ:URBN) and good old Abercrombie & Fitch (NYSE:ANF). The two companies reported results that told two stories in this recession.

Urban Outfitters (URBN) saw same-store sales rise 5% in December. The company’s more expensive brands, Anthropologie (women aged 30-45, a la J. Crew) and Free People (for the tree hugging hippies), rose 10% and 8%, respectively. Total sales in November and December rose 16% YoY to $452M. Most notably, direct-to-consumer (read: online) sales rose 28% over the holiday, stemming from the company’s successful website and catalog (yes, some forms of print media aren’t dead). The stock finished 134% up for the year—an impressive showing, even as practically all retail climbed in 2009.

Urban Outfitters: so indie sometimes, it hurts.

Some other facts and data about the company:

  • 325 UO, Anthropologie, and Free People stores in US/EUR/CAN, including one “Terrain” brand garden center. The company’s wholesale business sells to 1,400 specialty stores
  • 29 new store openings in 2009
  • CAGR of 27% from 2004-2008; sales of $1.8B in 2009
  • Urban Outfitters targets unusual retail space—including a former bank, movie theater, and stock exchange
  • Profit margin in FY 2009 (year ended 1/31/09) was 10.9%, and 10.7% in 2008 and 9.5% in 2007.
  • The company also has a wholesaling segment, which represented 14.9% of consolidated net sales for FY 2009
  • FY 2010 results announced 2/4/10

Meanwhile, Abercrombie & Fitch (ANF) continues to struggle to regain its preeminence among specialty retailers in the mall. ANF has reduced the time until new merchandise gets marked down, and actually promoted its sale with in-store advertising (something I have never seen the brand do).

Yet 2009 saw the closing of the company’s two dozen or so Ruehl stores (a costly misadventure resulting in impairment of about $116M). YoY sales comps have doggedly come in below estimates for months, and yesterday’s -19% December sales figure looks absolutely bottom-barrel compared to other retailers. Online sales held up better, declining only -4% compared to December 2008--that was just about the only good news reported; tweener brand Hollister reported comp sales of -25%.

Looks like this holiday season parents and teens alike avoided the mall and maybe did something, you know, as a family. Or at least avoided ANF's stores like Lindsay Lohan avoids underwear.

My thought is that ANF has continued to perform poorly as the recovery has not fully solidified, and consumer spending hasn’t returned to 2006-2007 levels due to the scale-back of consumer credit. While those systemic conditions adversely affect all retail/consumer spending, ANF is particularly sensitive because of its “defend the high-water price mark” strategy, as the company refused to drop prices throughout the recession.

As a result, the brand has lost many adherents (possibly permanently) to competitors American Eagle Outfitters or Aeropostale,who offered similar products for deeply discounted prices relative to Abercrombie. ANF will have to strongly demonstrate its value to US customers and differentiate its products in order to get on the teenage mall-goer’s radar again.

A long on ANF, at this point, is a bet on the company’s international strategy—which, as Dasan and I have discussed, appears to have kicked off extremely successfully. The jury is still out whether the brand will be able to successfully scale outside the U.S., though.

So why did URBN succeed so handily? Brand presence through the company’s catalog and website. Prime retail locations in recession-hardy areas (such as college towns like Cambridge or Ann Arbor) that continued to be hang-out spots even in hard economic times.

Most importantly, a great number of UO locations are not in the mall, but on busy city streets that will continue to receive daily foot traffic (whereas malls requires an explicit desire to shop). UO is much more likely to get potential customers in the door--to thumb an interesting book, or look at the eclectic home and dorm goods (typically placed prominently at the front/first level of the store); not many people brave ANF's booming dance music unless they actually want to buy the clothes (after all, you don't need to go in the store to ogle the sexy shirtless models). UO has a wide variety of apparel and goodies up and down the price column, including a plethora of cheap products that people purchase because they're cute, $5-$10 throwaway buys (that add up over hundreds of stores).

A fashionable friend of mine also suggested this little nugget as to why Urban Outfitters has been wildly successful--you can buy an item of clothing from UO (a pair of leggings, a scarf, a jacket, etc.) and not be conspicuously branded as an "Urban Outfitters" kinda guy/gal (although plenty of customers do just this). Stocking basics and innocuous items that don't necessarily imply a lifestyle choice allows UO to tap an entirely different audience than the "scenesters" who deliberately build their wardrobes from the store. In contrast, while ANF also offers "basics," these are still all moose-marked,which undoubtedly turns off some shoppers who otherwise want to buy a simple cami or polo shirt. Not to mention the thudding music, headache-inducing scent, and jailbait store employees are considerable obstacles for the uninitiated shopper. Oh, yeah, and I question anyone over 30 (and I'm being generous here) who is still wearing A&F.

The recession didn’t create winners and losers, but it sure exposed good and bad retailing strategies. While I still like ANF for the potential (and nascent success) of its international business, I think Urban Outfitters has a solid business strategy that resonates with a wide variety of shoppers (I mean, who doesn't self-identify as eclectic/nerdy/artistic/non-mainstream in this era of social network narcissism?) ANF cut its teeth as the best retailer in the mall on its cult of exclusivity, but that strategy only works when the cool kids actually wear the clothes.

Disclosure: Author holds a long position in ANF