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Specialty Apparel: More Idiosyncratic Success

Thomas Paulson
Dec 1, 2023
Specialty Apparel: More Idiosyncratic Success

In August, we wrote on the “idiosyncratic success” that certain specialty chains were producing. This quarter, that success spread to Old Navy, where comparable-store sales grew +1.0% year-over-year, or +6.5% over 2019 (compared to -6.0% in Q1 2023 and -0.9% in Q2 2023). Placer traffic shows progress going into November (below) from declines in July, offering encouraging signs in traffic, conversion rate, and sales. Gap Inc’s other brands Gap and Banana Republic are still works-in-progress, Athleta worsened with comps down -19%, and the company's Q3 2023 press release read, “Sales in the quarter continued to be challenged as the brand laps last year’s elevated discount levels and the team works to re-engage its core customer through better product and brand right marketing.”

Gap's consolidated gross margin improved +263 basis points and is on track for a full recovery for the year (to 38%). However, EBITDA margin (8.2%) has a longer recovery given the expense deleverage resulting from the revenue decline. Inventory turnover is improving and the business generated nearly $650M in free cash flow during the past two quarters.

In discussing the progress of reinvigorating the Old Navy brand, new CEO Richard Dickson (who came from Mattel) said, “Brand reinvigoration is about driving both relevance and revenue...Brand reinvigoration will build on that heritage and will include a number of priorities. We need to strengthen our portfolio brands with crisp identities and purpose. We need to create trend-right product assortments with a clear point of view to deliver beyond just needs to also deliver [on] wants. We must consistently deliver merchandising presentations and product storytelling that excites our customers. We have to create a better, more engaging omnichannel experience with a clear and compelling pricing strategy. We have to communicate through innovative marketing to regain a powerful ongoing voice in the cultural conversation, and we need to do this while consistently executing with excellence at every touch point, and interaction...Old Navy is a family destination with 94% U.S. brand awareness according to YouGov, a multibillion-dollar e-commerce business and an impressive retail footprint that includes more than 1,200 locations with 240 million customers entering our stores in the last year. We have a loyal following and a great brand heritage, rooted in fun, fashion and value for the whole family. Old Navy has a strong and distinctive brand positioning in the value space. However, the execution of that positioning is a significant opportunity. We need to be more deliberate and consistent about how we express the brand through bold and breakthrough narratives, something the brand is known for. We also have to improve our product assortments, balancing essentials with exciting new trends and a pricing strategy that clearly communicates jaw-dropping value. All of this to remind customers why they love Old Navy and give them compelling reasons to love us even more...We created stronger product storytelling through a dedicated women's marketing campaign featuring on-trend product. We also improved site execution and online marketing with compelling creative and value messaging, all of which drove positive momentum and share gains in the quarter. Looking ahead to holiday, we believe the brand is ready to compete with high-quality inventory composition, offering consumers great fashion at a great value.”

Other highlighted idiosyncratic retailers reported stellar Q3 2023 updates, and many indicated a strong start to the holiday season. When we previewed the Fall season and reviewed Halloween, we pointed to a potential impact from student loan repayments. While there may be an impact, the impact is centered upon the less-affluent and a small segment of consumer expenditure. As such and by in large, we don’t expect any appreciable impact from student loan repayments on the holiday season given the results reported by off-price retailers, Gap, Abercrombie & Fitch, and Urban Outfitters Inc.

The Abercrombie & Fitch brand’s sales per location are up +118% compared to 2019 and EBITDA margins of 17.5% were a record. The year’s margins should exceed 15%, again a record. Moreover, Hollister is also on the mend with sales per location to hit $5.5M, which is even with 2019. (Abercrombie will hit $9M). CEO Fran Horowitz-Bonadies said, “The Hollister women's business continues to lead the way for the brand growing nicely and showing balance as tops, bottoms and dresses all helped drive sales improvement to last year. As we discussed last quarter, we entered back-to-school with purposeful distortions to dresses, non-denim bottoms, and select top categories all of which did well for the balance of the quarter. Importantly, we have used these learnings to chase into winners for the holiday season...Looking forward to the fourth quarter, the Abercrombie brand has had a great start to November, continuing at historic 2023, and we're confident our customers will love what we have for them this holiday season...With strong brand positioning and highly product strategies in place for each brand, we are accelerating our marketing investment in the fourth quarter to capitalize on heavier traffic and drive customer acquisition and retention.”

Anthropologie produced a +13.2% comparable-store sales increase and Free People saw a +22.5% increase, which will bring the businesses’ retail margins near their 2019 level for the year. Higher traffic and ticket (due to higher average unit retail prices, or AUR) contributed to the comp growth. New customer growth was also a contributor with Anthropologie new customers increasing +25% and Free People up double-digits. FP Movement comparable-store sales were +49% and customer growth was over 50%. Company-wide, gross margin improved by +500 basis points on higher markups and lower markdowns. For the year, Free People locations will average $5.4M in sales and Anthropologie will average $9.1M in sales. Unfortunately, the Urban Outfitters brand continues to struggle with -14% comps and getting the brand to turn has been more difficult than management aspired for.  

In discussing Q4, founder and CEO Dick Hayne said, “There has been much market chatter about a slowdown in consumer spending. As reported, our brands did experience a slight moderation in demand beginning in early October. I want to emphasize the word slight. November-to-date business is in line with October results and customers continue to choose fashion newness as their preferred purchase and are willing to pay full price for what they want.”  Placer clearly shows the slowdown for Anthropologie, which started in September, with each month down 10 points. November has been up 10 points from October and similar to September’s level (+17%).

Regarding Urban Outfitters, brand CEO Sheila Harrington said, "Negative traffic trends within stores and online remain our single largest challenge, and we know we have declined in consideration for our target consumer. In order to change the trajectory of the Urban Outfitters business, our teams have identified three priorities. They are curating the right mix of products for meaningful national and emerging brands, improving the relevancy of our internally generated brand products and connecting with and inspiring our customers where they are.” (i.e. apparel brand fundamentals.)

Discussing Free People, Harrington noted, “The consistently strong growth over the past few years at Free People can be attributed to the team's maniacal focus on the consumer and use of creativity in product, experience and marketing. We believe the brand can continue to achieve growth by expanding its reach and product offering. Distorting into select labels, including intimately FP, Priest and We the Free, along with our core Free People label will allow us to complete the consumers' lifestyle looks and welcome more people into the brand...The We The Free label includes several product categories, but we believe that significant growth opportunity exists in denim, accessories, and footwear. It currently accounts for over 20% of the brand's retail segment net sales and is experiencing outside growth. We plan for this label and the denim category, particularly to be a meaningful part of our continued growth.”

On FP Movement and its stand-alone retail (37 locations in the US), Harrington said, “The 4-wall performance has greatly exceeded our expectations. Sales productivity per square foot as well as overall store profitability of these stand-alone movement stores are performing at similar levels to the Free People brand despite Movement being a young brand that is still building brand awareness. Given the success of the current store fleet, we plan to open at least 25 additional FP Movement stores in fiscal year 2025.” Management’s aspiration of growing the brand to over $1B remains on track, versus an estimated $250M in revenue during 2023.

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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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