Edgy vs Popular: Who Wins

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Angelheaded hipsters burning for the ancient heavenly connection to the starry dynamo in the machinery of night, who poverty and tatters and hollow-eyed and high sat up smoking in the supernatural darkness of cold-water flats floating across the tops of cities contemplating jazz

- excerpt from Howl by Allen Ginsberg

How hard it must be to be ironic and wear plaid at the same time. Pity the poor hipster. The only place they can shop that really “gets” them is Urban Outfitters.  Urban Outfitters (NASDAQ: URBN) has been on a tear since their last earnings report on Aug. 20 and hosts its analyst day on Sept. 27. As I write I am listening to the UO music web page full of indie music angst for inspiration.   

Urban Outfitters carries the jeans that recreate the tatters of Ginsberg’s angelheaded hipsters but usually cost upwards of $75. They also carry the vintage-looking dresses, the Vans shoes and all of the other necessary accouterments of sardonicry. (I think I just made that word up). The company profile states it’s dedicated to urbane, educated 18-30 year olds. How ironic that CEO Richard Hayne created Urban Outfitters as a Wharton School of Finance  entrepreneurship assignment. (The ‘rents (parents) may have been right. B-school doesn’t have to be a sell-out.)

But Urban Outfitters also reaches out to other demographics with Free People, another division targeted to the mid-20’s woman and performing very well with sales up 12%. (Free People was the initial store in 1970 and just carried cheap clothes and dorm furnishings.) Their Anthropologie store carries home accessories and fashion targeted to late 20’s and early 30’s women. The company also has two much smaller divisions, Terrain, a home and garden concept, and BHLDN, a wedding-centric store.

Urban Outfitters has 431 stores in the US, Canada and Europe. Several analysts have mentioned the success of their 10 e-commerce sites, all very engaging and well-designed, personalized to the timbre of each line. The websites alone drive 20% of sales. Urban Outfitters designs and manufactures much of the merchandise but also carry popular and fashion forward lines.

Its P/E is 31.10 and the forward P/E (fye Jan. 2014) is 20.35. The return on assets is 10.86% and quarterly revenue growth is 11.00%. Urban Outfitters is up 66.04%, more than double the S&P 500 in the last year. Analysts are impressed with their growth and believe that and the company’s active share repurchase program more than makes up for the lack of a dividend.

Urban Outfitters' direct competitors are Gap (NYSE: GPS) and Abercrombie & Fitch (NYSE: ANF). On Sept. 27, the same day as Urban Outfitters' analyst day, Gap is debuting a new men’s collection by  winners of this year’s GQ Best New Menswear Designers in America competition including Saturdays NYC, Ian Velardi, Ovadie and Sons, Todd Snyder, BLK Denim and  Mark McNairy New Amsterdam. Gap has been playing catch up to more fashion-forward competitors like privately held H &M and Urban Outfitters and this debut collection is seen as another shot over the bow. Just this week they announced Rebekka Bay as Gap’s new creative director and executive vice-president for Global Design. Bay left H&M in 2011 after she created a very successful line for them called COS.

Gap has a 20.26 P/E and a 1.40% yield. The stock has recently been garnering some support as the company expands in China with 25 stores there already and 20 more to go within a year. On Sept. 21 it hit a 52-week high of $36.73 intra-day. The company already operates 3,000 stores and franchises 250 stores in 90 countries. It also has ecommerce sites and catalogs, representing their five brands: Gap, Old Navy, Banana Republic, Althleta, and Piperlime.

Gap has run over 121% in 52 weeks and shows no signs of slowing down. The stores’ diversity appeals to many different demographics and should have robust back to school and holiday numbers.

Abercrombie & Fitch, however, has been a dismal performer over the last year down almost 50% from its $77.49  high last October. The company has engaged Goldman Sachs to discuss options as activist investor Ralph Whitworth and his Relational Investors LLC call for major changes .

Rumors swirl of buyout at $55 a share for the 110-year old company whose ‘prepster with a little sizzle’ style has fizzled with young consumers.  In August the company guided lower for the rest of the year seeing a 10% decline in sales. The company is closing down domestic stores at a rate of about 45 a year although it opened 47 foreign locations this year.

Even down 50% the P/E is still high at 35.75 and the stock fell another 5% on Sept. 21. Abercrombie does have a 1.80% yield but that will hardly offset the recurring  trend lower. There’s not much reason to be in this name right now unless you think a buyout is imminent. The stock could go much lower before that happens, if it ever does happen.

So the only two names worth buying here are Urban Outfitters and Gap. One has a yield and seems to be refurbishing its mainstream and popular image to be a little more fashion forward and the other, Urban Outfitters, has more edgy and exciting growth prospects. Think it over as you drink your coffee and listen to indie music.

 


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