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Apparel Retail: Idiosyncratic Success

Thomas Paulson
Aug 25, 2023
Apparel Retail: Idiosyncratic Success

Following recent better-than-feared results from American Eagle, this week brought improved results from specialty apparel retailers like Abercrombie & Fitch, Anthropologie, Free People, and Bath & Body Works.  As shown below, traffic gains to Free People and Anthropologie are robust (the visitation data largely represents Anthropologie’s open-air centers). Given Altar’d State’s similar customer and real estate positioning as Anthropologie, along with similar gains in traffic, we’d expect privately held Altar’d to have similar comp-store sales gains. (See our report on Altar’d State from January.) This “fashion turn” also was seen in a favorable inflection at Nordstrom.

Why the better results for specialty retail, when department stores, discount stores (their non-consumables categories), more basic brands (Old Navy), and athletic footwear retailers have struggled as of late? To be frank, we are surprised. Urban Outfitters Founder Dick Hayne has been around for a long time and has seen many fashion and economic cycles. On the company's Q2 2023 update, Hayne observed, “The customer is definitely favoring the fashion over price. And that's apparent to us. Fashion newness is what's most important. She responds when the product first comes in and she is less responsive to markdowns. It's not to say that price isn't at all important, but I do think it's secondary. At the Urban Outfitters brand, I think it's a little bit different...If the item is right--and I would call out jackets is a good example--she will spend a reasonable amount of money for the item. But we do see many of our opening price points over indexing.”

In addition to visitation data, there are other ways to track which apparel retailers are connecting on fashion and newness--including improving merchandising margin, conversion rates, and inventory turns--which we will highlight in the summaries below. We’d also point back to last week’s reports on TJX and Ross’ results, where these KPIs were excellent.

Urban Outfitters

The strong sales results from Urban Outfitters Inc. ("URBN")--which includes the Urban Outfitters, Anthropologie, and Free People brands--in combination with lower inbound freight costs and lower mark downs (reflecting a less promotional environment across retail this spring/summer period versus last year’s heightened activity) resulted in 310 bps in operating margin expansion at the company and 54% operating income growth. Operating income from URBN’s retail businesses is now twice that 2019’s level. (Nuuly – the company’s secondhand and rental business, experienced a near doubling in revenue and an +85% increase in active subscribers. See our stories on how secondhand is now in fashion.)

Anthropologie’s comparable-store sales gains were driven by higher traffic (as we pointed out above), conversion rate, transactions, and average unit retail (AUR). The same drivers were also behind Free People’s gains. The FP Movement brand produced comps of +57% (FP Movement is comparable to Lululemon). Also driving Free People’s gains were double-digit increases in customer growth. Brand Urban Outfitter’s suffered a steep decline in its digital business, including a high-single-digit decline in North America revenue. Brand President Sheila Harrington’s work to stabilize the brand remains ongoing, especially the accessories, footwear, and home businesses. Company-wide retail merchandise margin improved +416bps year-over-year and inventory turns improved sequentially to 5.55x in Q2 2023 from 5.04x in Q1 2023. Management’s outlook for URBN in the second half of 2023 called for more of the same: good growth.

As it relates to Anthropologie’s momentum, brand President Tricia Smith said, “It was essential that we developed the right mix of owned brand fashion, customer favorites and premium brands…especially in core categories such as dresses and denim, introduce new concepts that appeal to different end uses, such as an assortment that satisfies for vacation and casual needs and elevate the edit of market brands to modernize the assortment to appeal to a younger customer.

We began by improving and expanding the own brand assortment...Today, our own brand product makes up over 60% of the apparel assortment. We have elevated our market brand assortment with the selection of premium brands that are aspirational for the younger customer such as Reformation, Favorite Daughter, Good American and On Running...We have invested in marketing to drive customer acquisition, conversion and retention. In North America, during the second quarter, new customer growth surpassed 10%, while customer spend increased high single digits.”

Abercrombie & Fitch

As shown in the table above, brand Abercrombie had a stunning first half of 2023. With its results, management lifted its full-year sales outlook from +2%-4% to +10%, its operating margin outlook from 5.5% to 8.5%, and doubled its profit outlook. For Q2 2023, its gross margin expended by +460 bps (due to higher AURs and lower freight) and inventory turns improved to 3.0x from 2.7x compared to Q1 2023. Management also shared that both traffic and conversion had also improved, and that sales momentum has continued into August and that they are in “chase-mode” with inventories (a magic place to be for a retailer). CFO Scott Lipesky said, “We saw year-over-year sales gains improved each month as the second quarter progressed, driving results above the expectations we shared in May. On a regional basis, the Americas led the way with 19% growth.”

CEO Fran Horowitz-Bonadies commented on Abercrombie’s merchandise shared “Both men's and women's posted double-digit sales growth in Q2 2023. In women's, we continue to see strength in pants and dresses as our customers look for outfits to get them through their workday to their weekend getaway. On the men's side, we saw strength in knit tops and pants, all versatile seasonless products to outfit them for their everyday lives...The consumer is really responding to what we're doing. We're no longer a jeans and T-shirt business. We really have expanded into a lot of new categories. This young millennial can now wear this brand from work to their weekend getaway, and that's a great example, not of where we're seeing that extension of categories. We have in women's, a franchise called Sloane. It's all over TikTok. Women are loving that pant. We're offering it in many different fabrics and iterations. Our dress business has become a real destination. We have a best dressed guest collection that continues to grow year-over-year. She's coming to us for those important wearing occasions now from all of our social things that she's going out to.”

Reading between the lines from these various quotes, three other factors that may be at play here for the brands Abercrombie, Anthropologie, and Free People: (1) These companies have historically been somewhat idiosyncratic with their performance more typically the result of their fashion execution; (2) As the female millennial customer is more cautious in her spending, that may mean that she wants to touch and feel the goods before committing her hard-earned cash; that advantages brick & mortar over digitally-native brands like Revolve and Shein; (3) these brick & mortar brands are gaining more attention on TikTok. Revolve and Shein’s growth was propelled by the TikTok effect (they being early and deeply invested). Perhaps Abercrombie and other brands have now caught up to these early adopters.


Recall our report a few weeks ago about Revolve’s tepid outlook for Q3 2023. In past editions of The Anchors, we have written about Shein and their new fulfillment center (FC) northeast of Indianapolis. In those reports, we wrote about how the ramp from opening in the spring of 2022 had moved into a slump during Q2 2022. (We see this by looking at visitation trends to the FC, where the dwell time is longer than 150 minutes.) The chart below shows a deepening slump in activity since May. And so, maybe Abercrombie, Anthro, and Free People are gaining on Revolve and Shein; Shein is big in the U.S. at $10B in revenue, and a larger bite out of them can really move the needle for these “idiosyncratic brands.”

Supporting our viewpoint on Shein’s loss of momentum, was this week’s announcement that it was taking a one-third interest in Simon Property’s Sparc Group and entering into a shop-in-shop partnership for Sparc’s Forever 21 locations across the U.S. (414 stores nationwide). Shein’s customers will also be able to return items at Forever 21 stores. Forever 21 products will also be sold by Shein broadening its distribution and getting in front of its 150M customers.

We thought we'd also provide a couple of quick comments about Gap Inc. which is in turnaround mode. Incoming CEO Richard Dickson said of why he took the job and his vision, “[T]he apparel and retail landscape has changed dramatically. Evolving at an even quicker pace now, it requires that great brands run at the speed of culture to maintain relevance. What has not changed is the customer's desire for fashion that they can make their own. We will take that one step further, making what we do, what we stand for and what we sell relevant. As anyone in this industry will tell you, clothing is a rational need while fashion is an emotional want. Our brands will balance both. Going forward, I'm confident that we have the scale, talent and determination to spark huge, defining trends again...In my previous role in toys and entertainment (Mattel), we always strive to make consumers fans and to grow those fandoms, and I want to apply that approach to our portfolio of brands, a virtuous cycle where our products and experiences motivate belief and loyalty that fans then badge and amplify in culture, growing the fandom, validating and inspiring us to even greater creativity and monetization. It works because everyone wins. Gap Inc. brands already have incredible fans. Our job now will be to excite and delight them even more, growing their numbers and the value of our brands...Broadly speaking, it's about really reigniting Gap Inc.'s culture to really empower creativity.” (Recall that Dickson’s most recent success was Barbie and the movie at Mattel.)

Dickson continued, “The parallel construction of where Mattel was and where Gap is, is very familiar: great assets, great talent; a moment where, to some extent, a lot of self-inflicted challenges, some within our control and some impacting our business and our industry. Ultimately, a phase that we are going to go through, which is really about unlocking the value of our brands through reigniting a creative culture. The balance of fundamental and/or fiscal responsibility and operational rigor, while you are driving a design-centric and creative culture, is the art and science of the leadership that you need to have in this business. It is a very familiar language. It's actually a very familiar model. And ultimately, you've got to be able to take swings that are calculated. Test, role, learn and scale and accelerate very, very quickly.”

Management expects Gap, Inc. revenue to decline by mid-single-digit clip during the second half of 2023. They also said that they were encouraged “by trend improvements as we exit second quarter and into August.” As Placer shows softening traffic for the period, that improvement indicates an improvement in the conversion rate. Recall that improvements in conversion rate precedes improvement in comparable-store sales and comparable traffic. As such, it will be interesting to watch for, and hopefully witness, a second-half improvement in these KPIs. Additionally, the declines in July also reflect a high level of clearance activity last year.

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Thomas Paulson

Director of Research and Business Development,

Thomas Paulson spent 20 years as a Wall Street analyst and a member of asset management teams at AllianceBernstein and Cornerstone Capital, representing top-50 ownership positions including Target, Home Depot, Nike, Amazon, Google, and many more. He brings consumer related expertise and knowledge of enterprises in retail, CPG, financial services, telecom, and entertainment.

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