You think marketing imagery at Abercrombie & Fitch (ANF – $33.43) is risqué?  We noticed new store displays at the San Francisco Urban Outfitters (URBN – $28.46) flagship that clearly are representative of sexual acts.  Frankly, we believe that this sort of visual merchandising make A&F look like Disney in comparison.

Inspired by retro 1990’s grunge fashion and more recently donned by the stars of the movie Twilight, most apparel retailers are experiencing relative strength in the plaid woven shirt trend today.  There’s always something that’s working even in a recessionary environment and plaid is it today.
 
But plaid (and even the entire woven shirt category at many apparel retailers) is an ancillary fashion item that will never move the dial.  Ultimately, a retailer needs to drive knit tops, denim, and fleece/sweater categories to experience top-line strength, especially during BTS.  Furthermore, the relative strength in plaid shirts will not be able to anniversary the more broadly appealing cardigan sweater success that most retailers enjoyed last year. 
 
Interestingly, many sell-side analysts believe that plaid fashions will materially improve the sales trend at Abercrombie & Fitch (ANF – $33.43).  But, every retailer from Forever 21 to Kohl’s (KSS – $53.10) offers plaid shirts today.  Competitor American Eagle (AEO – $14.00) has already begun to discount several of their plaid shirts.  And, despite their comparatively broad plaid shirt assortment, Pacific Sunwear (PSUN – $3.90) management largely admitted this week that they don’t see anything in the tops business today to materially improve sales during Q3.
 
It’s going to be an ugly BTS season.

A common thread has emerged this quarter amongst women’s specialty apparel retailers Ann Taylor (ANN – $13.85), Chico’s (CHS – $13.26), and Coldwater Creek (CWTR – $7.18).
 
Each of these retailers has suddenly decided to spend materially more marketing dollars in Q3 2009 versus LY.  The growth rates are rather dramatic given recent sales trends for the sub-sector. 
 
Get your popcorn ready!  This is going to be a fun quarter.  All of this incremental marketing spend by each of the aforementioned retailers may simply cancel each other out.  
 
ANN Conference Call – 08.21.2009:

“Incremental marketing investments of approximately $10 million in support of the new fall product launches at Ann Taylor and Loft.”
 
“Q4 off of Q3, I would expect our overall spend to be down about $5 million, Q4 2009 off of — versus Q3.  So the incremental investment, the heavy up-investment really is in the third quarter of this year.”
 

CHS Conference Call – 08.25.2009:

“Those savings will likely be offset in the third quarter by increasing marketing expense and accruals for performance based compensation.  We look for third quarter marketing expense to increase by at least 4 million to $5 million above the $26 million expended last year.”

 
CWTR Conference Call – 08.26.2009:

“We plan to invest in marketing in the back half of the year to drive traffic and sales, with the majority of the year-over-year increase in the third quarter.”
 
“We plan to increase our catalog circulation by approximately +40% in the third quarter of fiscal 2009 as compared to the prior year, as well as investing in national magazine advertising.  Yes, Richard, we don’t really want to break out the total ad expense, but what I will say is in the third quarter we do expect SG&A to go up year-over-year in the mid single digits, and that will be almost entirely — actually, it will be entirely due to the marketing advertising.”

Why does Aeropostale (ARO – $40.89) continue to outperform its peers? 
 
ARO management suggests that the “current generation of teen customers have truly embraced Aeropostale as one of its top brands of choice.”  We’re not sold on this thesis.
 
Today, we believe that ARO simply has less competition as others abandon the basic polo, t-shirt, and hoodie business and skew towards more fashionable product. 
 
Teens today (particularly females), have become increasingly more fashion savvy.  As a result, retailers including American Eagle, Pacific Sunwear, and even Abercrombie & Fitch have been forced to introduce riskier, more sophisticated, “aged-up” apparel.  The problem is that these retailers, who are primarily targeting a High School/College demographic, are competing with trendier, lower-price players such as Forever 21 and are on the receiving end of a smack-down. 
 
Meanwhile, Aeropostale, contrary to the company’s talking points, continues to target a younger Junior High female customer (12-14 years old), a demographic that AEO, ANF, and PSUN have largely walked away from over the past 4-5 years.  The desires of this less confident tween customer are largely met with ARO’s watered-down, directionally trend-right embellished logo t-shirts and fleece. 
 
Therefore, don’t believe ARO management’s spin.  In addition to rock-bottom price-points, we believe the aging up of the product in the teen sector largely explains why Aeropostale is one of the only retailers still experiencing strength today in categories (graphic tees and fleece) that have been down-trending on a macro level. 

Despite weak sales in the quarter, last week Children’s Place (PLCE – $30.96) became one of the few retailers to report inventory levels that were materially higher than last year.  The company’s management again provided a clever excuse for its inability to forecast its end of quarter inventory levels.  This time the excuse was the old standby… “higher inventory in-transit” and the company went to great lengths to remind investors that it “purposely slowed shipments of some Fall and Holiday merchandise” last year.  

The only problem is that 3-weeks into Q2 2009 (when the end of quarter inventory guidance was provided) management should have known about last year’s decision to push inventory receipts into Q3 2008.  Interestingly, nary a word was offered last year when discussing Q2 2008’s ending inventory levels.
 
PLCE management has a long history of being unable to forecast its end of quarter inventory levels.   
 
For example, inventory levels were higher than original guidance at the end of Q4 2008 “primarily as a result of the earlier Chinese New Year.”  Again, another ‘event’ that management should have known about 10-weeks prior to the end of the fiscal quarter when the inventory guidance was provided.    
 
The inability for a retailer’s CFO to accurately predict forward inventory levels is ridiculous.  But, let’s take it a step further.  PLCE does not provide quarterly EPS guidance.  Upon further reflection, why provide quarterly EPS guidance if the company’s CFO cannot provide a reasonable estimate of inventory levels 10 weeks prior to the end of the fiscal quarter. 
 
Until the company has a CFO in place with a better handle on the company’s finances, forecasting forward earnings, inventory levels, or last week’s sales is not advised.