Apparel Week In Review: Urban Outfitters And Abercrombie & Fitch

The past week was for Urban Outfitters (NASDAQ:URBN) and Abercrombie & Fitch (NYSE:ANF) was mostly about small progress on their respective goals. In its quest of being a prominent omni-channel retailer, Urban Outfitters has deployed several initiatives over the past couple of years and it most recently started hiring for its upcoming $106 million e-commerce distribution facility. In other news, Wall Street analysts gave their earnings estimate for the company’s first quarter. Abercrombie & Fitch, who has been struggling with weak customer response to basic product offerings and damaged brand image for some time now, announced that its marketing and in-store environment will not be centered on “sex appeal” anymore. Here is a quick roundup of the news that mattered for these companies.

Urban Outfitters

Urban Outfitters’ stock movement was a little wayward during the week, but it started and ended on the same point. At the start of the week, Wall Street analysts covering the company stated that the retailer is expected to report earnings of $0.30 per share for its first quarter of fiscal 2016. The company had reported EPS of $0.26 in the same quarter last year and the expected figure reflects a year over year increase of 5.3%. Given the persistent retail market scenario, it will indeed be a good show if Urban Outfitters’ bottomline results are able to match the expectations. ^[1]

Most recently, Urban Outfitters started hiring for its $106 million e-commerce fulfillment center, in Lincoln Highway, Gap, Pennsylvania, scheduled to open in June. This facility will replace the half-sized facility in Trenton, South Carolina and is expected to significantly improve the retailer’s e-commerce delivery efficiency. Urban Outfitters and others have been making aggressive efforts to revamp their respective e-commerce channels and gradually move towards omni-channel retailing. The new fulfillment center can be regarded as a small step on this front. ^[2]

Our price estimate for Urban Outfitters at  the company at $45 is around 10% premium to the current market price. We estimate revenues of $3.7 billion for the company in 2015 with EPS at $2.01, which lies within the consensus range of $2.49-$1.77, compiled by Thomson Reuters.

Abercrombie & Fitch

The main news about Abercrombie & Fitch during the week was the change in its in-store environment. Usually, the company hires scantily clad models for its stores and keeps the in-store lighting dim, which according to the retailer adds to its “sex appeal”. However, after several controversies and misfired merchandise launches, Abercrombie is finally going easy on this strategy. In a recently announced set of policies, the company said that it would no longer hire store staff based on their physical appearance. The tag “Brand Representatives” will be used instead of “Model”, and the staff would be given some discretion to select their workplace attire. Abercrombie will even do way with sexualized marketing in marketing materials and the lighting inside the stores will be turned up. This strategy is absolutely in contrast with what Abercrombie used to do and it is no coincidence that this is happening after Mike Jeffries’ departure from the company. Now that the company is looking to transition its brand image from a premium logo merchandise retailer to a fast-fashion company, it only makes sense for it to provide customers a new in-store experience. Moreover, the aforementioned change in strategies will even keep Abercrombie out of dangerous waters. ^[3]

In other less significant news, the company announced special compensation award for Arthur Martinez, the chairman of the board. When Mr. Martinez was appointed as the chairman last year, he was not given any additional compensation, and given the time and effort he has put in, the management has decided to award him special compensation. Apart from overseeing the operations, Arthur Martinez is working extensively for the search of a new CEO for the company. ^[4]

We estimate revenues of about $3.65 billion for Abercrombie & Fitch in 2015, with earnings per share of $1.27, which lies in the consensus range of of $1.84-$2.26, compiled by Thomson Reuters. Our price estimate for the company at $33.69, is significantly ahead of the current market price. With its ongoing process of replacing logo merchandise completely with fashion-forward inventory, we believe that the company can revive its performance in the future.

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1. Earnings of $0.3 Expected for Urban Outfitters’ Inc., Markets Daily, Apr 20 2015 [↩]
2. Urban Outfitters starts recruiting for June opening of new $106 million Gap facility, Lancaster Online, Apr 26 2015 [↩]
3. Abercrombie & Fitch Dials Back the Sex, The Wall Street Journal, Apr 24 2015 [↩]
4. Abercrombie & Fitch Announces Special Compensation Award for Chairman Arthur Martinez, Street Insider, Apr 22 2015 [↩]