Apparel sellers look to build on retail earnings strength

Trevir Nath, director of content
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The challenge retailers are facing this earnings season is to put to rest claims that consumers have curbed spending. Department stores kicked off with better than expected results last week, but Friday's retail sales figures for July showed overall softness.

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So far this week earnings momentum has been sustained with Home Depot, Dick's Sporting Goods and The TJX Companies all topping expectations. The rest of the week will feature the formerly beaten down apparel retailers. Tonight, Urban Outfitters is scheduled to announce results with reports from American Eagle and Gap rounding out the week.

Year-to-date stock performance

Many of the major themes we've seen impact the broader retail sector have also hurt Urban Outfitters. Increasing competition from fast fashion and online retailers are the primary culprits of the sales slowdown.

In the first quarter, sales grew 3 percent, a marked deceleration from the 8 percent gains reported in the same period a year earlier. Comparable store sales came in nearly flat, increasing by a meager 1 percent. This includes a 2-percent increase at Urban Outfitters, flat sales growth at Anthropologie, and a 2-percent decrease at Free People. Efforts to boost online sales and optimize inventory levels should offset some of the impact from outside trends.

Analysts at Estimize are calling for earnings per share of 57 cents, 9 percent higher from a year earlier. That estimate has increased 9 percent since Urban Outfitter's most recent report in May. Revenue is anticipated to post a 3-percent gain at $891 million, a slight slowdown from the second quarter last year. Shares are up nearly 36 percent year to date but down more than 4 percent in the past 12 months.

Following Urban Outfitters, we get results from American Eagle Wednesday before the bell. This is a name that has largely bucked the negative trends hitting the overall retail sector. In the first quarter, the company topped expectations by 4 cents per share on the bottom line and nearly $20 million on the top.

Strong upside across its core brands and expanding to international markets have been key to driving sales in recent quarters. Last quarter, comparable store sales grew by 6 percent, largely due to a 36-percent uptick in its Aerie brand. Aerie continues to show the most upside and will likely make up a large portion of growth in the quarter to be reported.

Analysts are looking for earnings per share of 22 cents on $820.18 million in revenue, according to crowd-sourced consensus data. Compared to a year earlier, that represents a 29-percent increase on the bottom line and 2 percent on the bottom. Earnings per share estimates have increased 10 percent in the past month, signaling a potential beat in tomorrow's report.

Gap closes the week with its scheduled report Thursday after the market closes. Investor's hoping for a turnaround may need to wait a bit longer. The company releases many of its key metrics on a monthly basis, so its quarterly results aren't often surprising. After reporting a jump in comparable store sales in June, that metric turned negative in July.

Overall comparable sales for the second quarter were down 2 percent. This includes a 3-percent decline in its namesake Gap brand, a 9-percent drop at Banana Republic and flat Old Navy sales. Shares are still up 44 percent in the past 3 months.

The company expects earnings per share for the quarter in the range of 58 cents to 59 cents. That compares to the Estimize consensus of 56 cents, or a 16-percent decline from a year earlier. Those estimates have increased 15 percent since Gap's most recent report in May.

The increase in expected earnings is likely a result of steadily improving margins and ongoing cost-cutting initiatives. Sales, on the other hand, will continue to be challenged from continued discounting and low turnover. Back-to-school sales and the release of its fall lineup in the coming months could provide a much-needed boost to the top line.

Early signs would suggest that apparel retailers, specifically Urban Outfitters and Gap, are headed for another dismal quarter. But surprising wins in the sector over the past seven days would suggest differently. The once beaten-down retail industry is in for another test with clothing retailers in the upcoming days.

How do you think these names will report? Be included in the Estimize consensus by contributing your estimates here!