Retailers Causing Backlashes With Hurricane Sandy Tactics: Are Their Stocks as Lousy as their Marketing?

BA is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

I prefer to use levity whenever possible. But there are certain things that should never be made light of -- and that includes any event that destroys property and causes injuries and deaths. Apparently, the folks at Urban Outfitters (NASDAQ: URBN), American Apparel (NYSEMKT: APP) and other retailers never got that memo.

Hurricane Sandy wracked devastation on the Washington, DC through Maine corridor, killing 109 people at last count, washing away scores of homes and businesses, flooding many others, and leaving millions without power. Total economic costs are currently pegged at about $50 billion, making it the fourth costliest disaster in U.S. history.  

It wasn't so much that retailers were having online sales (a fair number of people who were safe, had power, and were stuck inside likely welcomed them), it was the wording and images that people found most offensive. While there were a fair number of retailers whose online marketing during Sandy people found insensitive, we're focusing on the two many seemed to find worse than insensitively opportunistic. 

Testing the Premise: Is 'Louse-y' Marketing a Sign of a Lousy Stock?

While reading people's angry comments, I wondered if there was any correlation, as in louse-y marketing tactics = lousy stock. Is the poor lack of judgment behind them a warning sign for investors or potential investors of major existing problems or future ones?

If we could set up a dunking booth, I'd let you vote your opinions with throws! Then we'd see how clever these retailers would find our word play on Sandy's "water." Get your "voting" arm ready...

Dunking Booth #1: Urban Outfitters

Operations

The company, based in Philadelphia, operates "lifestyle" stores under several brands.

Urban Outfitters (UO) sells apparel, accessories, and other items for young adults aged 18 to 28;  Anthropologie sells similar items, but is geared toward women aged 28 to 45; Free People is geared toward "young contemporary" women aged 25 to 30; Terrain specializes in garden products and landscape services; and BHLDN sells wedding items.

Online Marketing During Sandy

  • Play on the word "blow."
  • Site showed company's in-house blogger logging off to take shelter, as a picture of Frankenstein emerged from the ocean.
  • Sale discount code "AllSoggy."
  • Started sale before Sandy hit, which, given severity was then unknown, people are deeming especially offensive.

Here's one image:

<img height="306" src="http://distilleryimage5.s3.amazonaws.com/af62842821e611e2a8a522000a1f9c9f_6.jpg" width="306" />

The company is based in Philadelphia, so it doesn't have the "excuse" of being far removed. That region was darn close to Sandy's bullseye, so it suffered serious damage. Further, many in that region vacation at the New Jersey Shore, which was where Sandy made landfall, and which was largely devastated. Millions of people lost power and some remain without it a week later, which means no heat for many. In Philadelphia, NJ, NYC, and regions north, temperatures are in the 40s and 30s at night. The demand outstripped the supply for gas-powered emergency generators, and even those fortunate to have a generator still might be cold since there was -- and remains -- a gas shortage.

The word play on "blow" is analogous to using the following when another killer earthquake hits the San Francisco region:

Hey San Fran! Want to know what else is 'shaking'? Our rockin' online sale...

Can you imagine?

But what people are finding most egregious is the promotion code for the sale: "AllSoggy." Unbelievable! Indeed, many people were soggy; some of them shivering cold and soggy, as they rescued pets, the elderly, and children. Let's only hope, UO, that the cash stashes of the AllSoggies that were earmarked for new duds didn't get "TooSoggy."

A comment on an UO site:

"Do you do realize that 26 people have already died in the US from this storm already?....And you use it to promote free shipping?????? I don't want to live on this planet anymore."    

Corporate Governance Ratings

The Motley Fool places considerable importance on Corporate Governance characteristics, as do I. Poor ratings often mean none of the other metrics matter all that much, at least to long-term investors. 

Both the May 1 and just-posted Nov. 1 ratings follow:

<table> <tbody> <tr> <td>Urban Outfitters Inc.’s Governance Risk Indicator (GRI®) as of <strong>Nov 1, 2012 </strong>is: Audit (Low Concern), <strong>Board (High Concern),</strong> Compensation (Medium Concern), Shareholder Rights (Low Concern).</td> </tr> </tbody> </table>

 

<table> <tbody> <tr> <td>Urban Outfitters Inc.’s Governance Risk Indicator (GRI®) as of <strong>May 1, 2012</strong> is: Audit (Low Concern), <strong>Board (High Concern),</strong> <strong>Compensation (High Concern</strong>), Shareholder Rights (Low Concern).</td> </tr> <tr> <td>Brought to you by <a href="http://issgovernance.com/grid-info">Institutional Shareholder Services (ISS)</a></td> </tr> </tbody> </table>

Source: Yahoo! Finance

Board is rated as "High Concern" in both ratings; Compensation was rated as "High Concern" until Nov. 1, when it was upgraded.

  • Board -- Ratings reflect upon qualifications of members and strength.
  • Compensation -- A "High Concern" rating means the compensation of the top execs is deemed excessive and/or the incentive pay structure is not aligned in the best interests of shareholders.

High Concern ratings mean digging is needed. Generally, stocks with such ratings are best left to short-term speculators and traders.

Dunking Booth #2: American Apparel

Operations

LA-based American Apparel primarily sells casual fashions for women, men, and children.

The company's CEO has been no stranger to controversy. There's plenty of information out there on that topic. We'll focus on the mission at hand.  

Online Marketing During Sandy

  • Used sale promotion code "SandySale."
  • Lead into sale with "In case you're bored during the storm..."
  • Started sale before Sandy hit, which, given severity was then unknown, people are deeming especially offensive.

A comment on Twitter: "Sandy Sale email blast? Really? The lowest of low."

Corporate Governance Ratings 

The most current rating on Yahoo! Finance:  

<table> <tbody> <tr> <td>American Apparel, Inc.’s Governance Risk Indicator (GRI®) as of Jul 1, 2011 is: <strong>Audit (High Concern),</strong> Board (Low Concern), <strong>Compensation (High Concern),</strong> Shareholder Rights (Medium Concern).</td> </tr> <tr> <td>Brought to you by <a href="http://issgovernance.com/grid-info">Institutional Shareholder Services (ISS</a></td> </tr> </tbody> </table>

 

Audit and Compensation rated as "High Concerns."

  • Audit -- Such a rating means you can't put much stock in reported numbers. When you can't put much stock in reported numbers, you can't do a meaningful analysis.
  • Compensation -- Such a rating means the compensation of the top execs is deemed excessive and/or the incentive pay structure is not aligned in the best interests of shareholders. 

Stocks with such ratings are usually best left to short-term speculators and traders.

Select Key Stock Stats for Both Companies

 

<table> <tbody> <tr> <td> </td> <th>URBN</th><th>APP</th></tr> <tr> <td>Market Cap</td> <td> 5.32B</td> <td>116.78M</td> </tr> <tr> <td>P/E (ttm)</td> <td>29.3</td> <td>N/A</td> </tr> <tr> <td>Qtrly Rev Growth (yoy) (%)</td> <td> 11.0</td> <td>13%</td> </tr> <tr> <td>Qtrly Earnings Growth (yoy) (%)</td> <td> 8.1</td> <td> N/A</td> </tr> <tr> <td>Operating Margin (ttm) (%)    </td> <td>11.1 </td> <td>-2.2</td> </tr> <tr> <td>Profit Margin (ttm) (%)</td> <td> 7.2</td> <td> -7.2</td> </tr> <tr> <td>ROE (ttm)</td> <td> 14.9</td> <td>-102%</td> </tr> <tr> <td>Debt/Equity (ttm)</td> <td> N/A</td> <td>6.1</td> </tr> <tr> <td>Beta</td> <td>1.1 </td> <td> 2.6</td> </tr> </tbody> </table>

Source: Yahoo! Finance 

Urban Outfitters

Opinion: Better retailing stocks out there.

Supporting Data:

  • "High Concern" Corporate Governance rating
  • High valuation -- 29 P/E for current earnings growth is high

American Apparel

Opinion: Not a stock for long-term investors; best left to traders.

Supporting Data:

  • "High Concern" Corporate Governance ratings
  • High beta
  • Very high debt load
  • Negative profit margin

Retailers To Explore

I checked for retailers that have solid to excellent Corporate Governance ratings - no "High Concerns." The following also have strong, respected brand names. Long-term investors may want to use this list as a starting point for research.

  • Gap (NYSE: GPS),
  • American Eagle Outfitters
  • Under Armour (NYSE: UA)
  • Lululemon Athletica
  • Coach
  • Fossil (NASDAQ: FOSL)

Past performance is no guarantee of future performance. However, it does often reflect competitive advantages, how well management can execute, and other factors.

The first chart shows UO's and American Apparel's 5-year stock price performance. The second chart shows those of the retailers listed above. (Shaded area represents official recession period.) I didn't show Lululemon as its huge return -- 540% -- made it more difficult to view the others' graphs. All but one of the six stocks listed above (AEO) have outperformed UO and American Apparel.

 

<img src="http://media.ycharts.com/charts/a11f58efcb246e673a856c1e608814f6.png" />
 

URBN data by YCharts

 

<img src="http://media.ycharts.com/charts/155de6b482f1bfbb4fadb0e71c8600a1.png" />

GPS data by YCharts

Investor Takeaways

American Apparel's stock is not suited for long-term investors. Urban Outfitters seems a so-so stock; there are better candidates out there for long-term investors.

Long-term investors should generally steer clear of stocks with poor Corporate Governance ratings. They often under-perform over the long-term.

Lastly, while companies can use whatever marketing tactics they want, you as a consumer have the power to vote your approval or disapproval with your spending dollars.

 


BAMcKenna has no positions in the stocks mentioned above. The Motley Fool owns shares of Fossil and Under Armour. Motley Fool newsletter services recommend Fossil, Gap, and Under Armour. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

blog comments powered by Disqus