Yahoo Finance Healthy retail sales number belies rapidly evolving industry dynamics
Retail sales rose 0.6% in September, which was in line with expectations. This marked the highest increase in three months.
This highly anticipated data release is important as consumers are the biggest driver of US GDP. Consumer spending, which accounts for more than two-thirds of GDP, has been helped by gradually rising wages. This is encouraging amid the weak business investment cycle as seen in durable goods numbers.
But when it comes to individual names, there is still a world of pain as many companies try to contend with changing shopping dynamics—notably the shift to online retail. While major department stores like Macy’s (M) and Nordstrom (JWN), along with specialty retailers like Gap Stores (GPS), have somewhat stabilized, same-store sales remain in the red and promotional activity remains aggressive.
One of the groups most under pressure? Teen retailers, which reflect most significantly quick-changing fashion preferences, given their younger customer base. And one name in particular trying to boost traffic and turn around trends is none other than Abercrombie & Fitch (ANF), once a pop culture iconic brand.
Abercrombie woes
On Thursday, Abercrombie & Fitch rolled out a new ad campaign. The teen retailer is trying on a new message that focuses on being positive and inclusive. Maybe it’s part of a broader reaction to Donald Trump.
However, it may be too little, too late. After all, it’s been two years since former CEO Mike Jeffries stepped down as CEO in December 2014. Jeffries became CEO in 1992 and had been credited with the company’s focus on the appeal of exclusivity (and racy catalogs).
He said things like, “we go after the cool kids. We go after the attractive all-American kid with a great attitude and a lot of friends. A lot of people don’t belong, and they can’t belong.” Or “I don’t want our core customers to see people who aren’t as hot as them wearing our clothing.” Or “I think that what we represent sexually is healthy. It’s playful. It’s not dark. It’s not degrading.”
The promise for a new image hasn’t followed through to investors. The stock is down over 40% over the past two years.
And the company’s new advertising campaign may be too little, too late, according to analysts.
“This new brand position is the product of an 18-month effort to create a brand identity that communicates our focus on our customers’ needs and aspirations,” said Abercrombie CMO Fran Horowitz in the company’s press release on Thursday. “Rather than buying clothes that symbolize membership in an exclusive group, today’s consumer celebrates individuality and uniqueness. Our new brand reflects that confidence and independence of spirit as well as our own dedication to a more diverse and inclusive culture.”
With comparable store sales down 4% in its most recent quarter, a turnaround may not be a slow process.
Meanwhile, the company continues to contend with a difficult, promotional teen shopping environment, according to Stifel. And tourist spend in the US has also declined significantly.
A stand-out retail growth name
One bright spot amid dismal retail results? Ulta Salon (ULTA), which has surged almost 45% year-to-date.
The stock spiked over 11% on Thursday after pre-announcing third quarter comparable store sales increased 14% to 15%, up from previous guidance of 11% to 13%.
CEO Mary Dillon upped the company’s long-term store outlook to 1,700 doors, above its previous 1,200 door target introduced in 2012 and with significant upside from its current 907 locations at the end of its second quarter.
The company’s analyst day focused on its role as an essential analytics company, benefitting from a strong loyalty customer base and growing category.
And while the stock is expensive, Ulta’s unique positioning makes it attractive. And Morgan Stanley analyst Simeon Gutman said not to overthink valuation.
“There are few, if any, stories like Ulta in retail.; comping low teens, generating 20% EPS growth. The category is fragmented, the store is experiential and business is benefitting from a shift away from malls to strip centers,” he wrote in a recent note.
While Abercrombie’s underperformance and new brand efforts may seem to offer an attractive entry point for investors, risks—including the difficulty to turn around its distinct brand—prevail. Ulta, meanwhile, continues to ride its data-driven momentum in the beauty category, bucking the difficult trends in the retail sector.
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