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Competition in Teen Retail Spurs Analysts’ Concerns

As teen retailer Urban Outfittersprepares to release its quarterly earnings on Monday after the closing bell, two analysts expressed their concerns about the space’s intense competition.

Urban Outfitters
Source: Wikimedia Commons
Urban Outfitters

Stacey Widlitz, president of SW Retail Advisors and a CNBC contributor, said teen retail’s “incredibly promotional” environment may not go away any time soon. Still, she expects to hear positive comments about the spring retail season during the company’s earnings report due, in part, to this year’s unseasonably warm weather, which has boosted retail sales.

“They’ve told us that their same-store sales are up about 2 percent, and we know, like the other retailers out there, they’ve tried to clear that extra inventory out there and at a cost, so gross margins may be down close to 1,000 basis points, similar to Aeropostale,” Widlitz said.

Kimberly Greenberger, a managing director at Morgan Stanley, echoed Widlitz’s comments about teen retailer competition.

“We share Stacey’s concerns about the very intensely competitive pricing dynamic in the mall right now among these teen retailers, and so it’s just tough to make a lot of money for any of them at the current moment,” she said.

However, Greenberger said she was getting incrementally more constructive on American Eagle Outfitters, which Morgan Stanley upgraded to “equal weight” from “underweight” in early December.

American Eagle recently named former Levi’s executive Robert Hanson as its new CEO. Last week, it reported quarterly earnings that met Wall Street’s expectations, but its revenue that fell shy.

“We were very encouraged last week to hear his views on controlling inventory — far more going forward than the company has in the past and also returning the organization to a focus on returns on invested capital, both of which we think are very positive for shareholders,” she said.

Greenberger added that some teen retailers could also benefit from J.C. Penney’s decision to overhaul its business model with a new pricing strategyand its plan to offer “stores within a store,” in addition to more exclusive goods from such brands as Martha Stewart.

The department store’s transition could benefit some retailers at the lower end of the scale, such as Gap’sOld Navy brand and Aeropostale .

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CNBC Data Pages:

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Disclosures:

Neither analyst owns shares. Morgan Stanley has either provided or is providing non-investment banking services to Abercrombie & Fitch within the last 12 months.

Disclaimer

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Follow Katie Little on Twitter @katie_little.