Apparel Week In Review: L Brands, Urban Outfitters And American Eagle Outfitters

The past couple of weeks were very pleasing for L Brands (NYSE:LB) as its September results beat analysts’ estimates, for which it was rewarded with a ratings upgrade from a few firms. On the other hand, Urban Outfitters (NASDAQ:URBN) had a bleak couple of weeks as its stock took a beating after it provided third quarter sales update. Nothing much happened for American Eagle Outfitters (NYSE:AEO), apart from Shopkick announcing its success and the retailer being reassured of its popularity. Here is a quick roundup of news that mattered for these companies.

L Brands – September Results Beat Estimates

The parent company of Victoria’s Secret and Bath & Body Works, L Brands, reported its September sales results earlier this month. The retailer’s comparable sales increased by 6% during the month, that was marginally better than the consensus estimate. In fact, the company’s growth rate has picked up slightly from August, which is impressive considering the prevailing economic uncertainty. L Brand’s fresh collection received tremendous customer response that drove its comparable sales higher. For Victoria’s Secret Stores & Victoria’s Secret Beauty, comparable sales increased by 4%, while they surged 10% for Bath & Body Works. Interestingly, Victoria’s Secret’s direct channel was able to register decent positive growth of 5% following several quarters of slump. Overall, L Brands’ sales increased by 9%, that summed up a terrific quarter for the retailer.

In other news, L Brands received a stock rating upgrade from Wells Fargo & Co., following its impressive September performance. In a research report released on Thursday, the firm upgraded the retailer’s investment rating from market perform to outperform. A few days before that, RBC Capital had raised its price target for the company from $68 to $70, and Telsey Advisory Group had uplifted its target price from $73 to $80. Even Credit Suisse has revised its target price from $73 to $74, while reiterating its outperform rating for L Brands. ^[1]

We estimate revenues of about $11.5 billion for L Brands in 2014, with earnings per share of $3.18, which lies in the range of market consensus of $3.20-$3.17, compiled by Thomson Reuters. We currently have a $62 price estimate for L Brands, which is about 10% below the current market price. However, we are in the process of updating our pricing model in light of the company’s accelerated growth.

Urban Outfitters – Stock Plummets

Shares of preppy apparel retailer Urban Outfitters slumped by close to 13% after it provided a disappointing update on its third quarter sales. The company said that the negative sales trend it reported in early September has persisted to date. It also said that based on weak sales across the board, its gross margins for the third quarter can deleverage at a greater rate as compared to the first two quarters. ^[2] After the company reported 12% decline in its Q2 profits back in August, the head of the Urban Outfitters Group division stated that stores were facing several headwinds, and they were still in the early stages of recovery. Considering the recent update, the company’s third quarter results will most likely be lackluster, and its stock can take another beating after Q3 earnings release.

We estimate revenues of about $3.4 billion for Urban Outfitters in 2014, with earnings per share of $2.00, which lies in the range of market consensus of $2.03-$1.83, compiled by Thomson Reuters. We currently have a $43 price estimate for Urban Outfitters, which is about 25% above the current market price.

American Eagle Outfitters – ShopBeacons were Successful

The past week was mostly uneventful for American Eagle and its stock fluctuated around $14 mark. A couple of days back, Shopkick, who has partnered with America Eagle, reported that it has given more than $1 billion in incremental revenues to its retail partners. Shopkick initially installed its ShopBeacons in 100 American Eagle stores that send a notification to customers’ smartphones when they enter the store. These notifications offer a small incentive to customers who visit fitting rooms to try clothes. Ultimately, such customers end up buying more. ^[3] While American Eagle is yet to roll this concept out on a massive scale, early success should encourage it to consider ShopBeacons’ aggressive deployment. The retailer is already struggling with weak demand, and hence needs to search for different and innovative ways to drive store traffic.

In other news, American Eagle received an impressive 2nd rank in Piper Jaffray & Co’s fall survey of over 7,200 customers across the country, just behind Nike (NYSE:NKE). This survey suggested that American Eagle is considered the best casual apparel retailer in the country, even when several shoppers have shunned the brand lately for fashion forward products at other retailers. ^[4] The survey’s results may not have any significance, but they can reassure American Eagle that customers haven’t forgotten the brand altogether. They can return to the retailer’s stores if it addresses its merchandise issues effectively.

We estimate revenues of about $3.1 billion for American Eagle Outfitters in Fiscal 2014. We currently have a $13.45 price estimate for American Eagle Outfitters, which is about 10% below the current market price.

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1. L Brands Upgraded At Wells Fargo & Co., Ticker Report, Oct 16 2014 [↩]
2. URBN Business Update, Urban Outfitters, Oct 16 2014 [↩]
3. American Eagle Outfitters says that beacons are driving better sales, Retail Customer Experience, Oct 15 2014 [↩]
4. American Eagle No.2 brand for teen shoppers, Business Journal, Oct 10 2014 [↩]