3 Retailers Fighting Economic Woes

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The U.S. economy might be recovering, but a very slow pace is complicating decision making for retailers. Retail spending in April slowed amid weaker economic data and cast doubts about the real recovery of the U.S. economy: lower creation of non-farm payrolls and new claims for unemployment insurance supported those fears.

Here's how three clothing retailers, Urban Outfitters (NASDAQ: URBN), Abercrombie & Fitch (NYSE: ANF), and American Eagle Outfitters (NYSE: AEO) are managing to fight the sluggish economic recovery: 

Urban Outfitters seems to be the best positioned in this difficult environment. Why? It has solid financials: net sales for the first quarter of fiscal 2014 increased 14% to $648 million over the same quarter last year, a record figure. Also, its net income rose 38.5% to $47 million for the same period, mainly due to controlled operating expenses. It also opened seven new stores and made improvements in its direct-to-consumer channel which increased 9% over the first quarter of fiscal 2013.

The teen market is in trouble

Both other companies: Abercrombie and American Eagle, have to fight in a very competitive market which hurt sales margins as promotions are increasing month over month. If we add to this the sluggish economic situation in the U.S., it will paint a troubling picture for retailers in this category.

Abercrombie is in the middle of the storm: for the first quarter of 2013, it posted a net loss of $7.2 million, showing that it has not recovered as in the first quarter of 2012 it had a loss of $21.3 million. Its net sales also decreased about 9% to $838.8 million and direct-to-consumer sales declined 17% to $534.9 million.

The company had problems regarding stock shortages and announced it is planning to close around 50 stores in the U.S. These are bad news for investors, but be aware of the international strategy the company is trying: it will open new stores in China, Australia, France, and the U.K. Its total international sales improved 10% to $303.9 million in the first quarter of 2013, so this could be a good alternative to diversify the risks in the U.S. economy, but a costly initiative if proven wrong.

Although American Eagle is in better shape than Abercrombie, last quarter's results showed some alarming signs that must be resolved. Its net revenue for the first quarter of 2013 decreased 4% to $679 million, operating income decreased 11% to $57 million, and comparable sales fell 5% compared to the same quarter last year. Despite this, the company’s balance sheet is strong and the best evidence for this is that management announced a share buyback plan of 20 million shares and an increase in quarterly dividend of 14%. Also, costs have been contained and promotions decreased, which resulted in an excellent operating margin of around 15%.

Final comment

It is a tough time for the clothing retailing sector. From this peer group, the company that is best positioned is Urban Outfitters. Its strategy of betting on the direct-to-consumer channel has been successful and it has shown some firm financial figures regarding sales, net profit, and operating expenses, which indicate that the company is healthy and management’s strategy is on track.

The next one is American Eagle. The company had negative results last quarter, including declines in sales and operating income. But, the firm has a very strong balance sheet and has been controlling costs and improving its operating margin which are fundamental to weather the storm. If Abercrombie continues to exhibit weakness in its financial results and sales, American Eagle could profit and increase market share in the competitive teen segment.

Finally, Abercrombie & Fitch posted losses in the last quarter and will have to act quickly to reverse this. The company has already announced the closure of several stores and that it will try opening new ones in other geographies. The international diversification strategy is interesting because it could diversify risk from the U.S. economic downturn, but it will demand capital expenditure and could impact its financials heavily if it fails.

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Vanina Egea has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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