Urban Outfitters (URBN – $41.55) CEO Richard Hayne (who owns 18.8% of the total outstanding stock) received very little pay last year (only $33K). But, he made sure that his son received $415K in total compensation during FY 2012. We wonder what David Hayne does at URBN to deserve such a rich pay package.

But, here’s what is most interesting. Anthropologie CEO, David McCreight’s annual bonus “criteria” is 75% based upon “individual initiatives.” See below.

Last year, despite his brand not achieving their “plan” (see Proxy Statement below), he achieved 5 of 5 “individual initiatives” (new stores opened, capacity utilization, customer penetration, asset turnover, and hiring of personnel).

But, the annual bonus criteria for Ted Marlow, the Urban Outfitters brand CEO, only allots 14.3% to “individual initiatives.” See below.

You see where this is going? Mr. McCreight was awarded a $1.377 million annual bonus for the last fiscal year even though Anthropologie did not deliver on its “plan.” Conversely, Mr. Marlow was only awarded a $126K annual bonus for the last fiscal year (also did not achieve its “plan”…but, Urban Outfitters significantly outperformed Anthropologie during the year).

Why does Mr. McCreight have such a ridiculous bonus criteria that is primarily focused on “individual initiatives” and allows for a rich payout even when the Anthropologie brand underperforms?

The fact is that Mr. McCreight’s Anthropologie brand has greatly underperformed, not just compared to Urban Outfitters, but also compared to many of its peers. Yet, he received a handsome bonus in FY 2012. URBN’s executive compensation, at least in the case or Mr. McCreight, clearly rewards (under) performance.

 

 Other than the ‘pure’ merchandise margins reported for ANF and CHS, it’s difficult to parse out the impacts of store occupancy, distribution, et al. But, if we view the Q4 2012 GPM% performance versus Q4 2009 (3-year), it becomes clear that ex-JCG and URBN’s top-line success over the past few years has come at a price… merchandise margin degradation.

We continue to believe that a material decline in the company’s GPM% rate over the past three years is likely indicative of a permanent degradation in the company’s merchandise margin rate.

We believe that it’s worth noting that both ex-JCG and URBN have enjoyed tremendous top-line success over the past few years… largely via out-sized e-commerce growth. Yet, their respective levels of profitability have come under pressure and remain so.

Let’s go one step further. The profitability decline at both ex-JCG and URBN over the past ~3 years can be traced directly to their dramatic GMP% declines. Therefore, out-sized e-commerce channel growth for specialty apparel retailers may not be all that it’s cracked-up to be.

Let’s take a look at the calendar 2012 stock price performance rankings for a variety of retail/consumer categories (click here to view PDF of complete listing by category):

Specialty Apparel Winners/Losers:

APP CACH HOTT

+117.0% +74.4% +43.8%

CWTR CTRN LULU

-34.3% -25.7% -18.2%

 
Retail Department Winners/Losers:

SHLD SKS KSS

+20.8% +9.1% +7.3%

JCP DDS JWN

-23.4% -6.2% +3.2%

 
Retail Specialty Hardlines Winners/Losers:

BBY RSH HGG

+86.9% +58.5% +57.2%

SCSS PETM FBN

-24.5% -9.2% -7.4%

(more…)

Sometimes you just can’t make this stuff up.

In the company’s Q4 2012 conference call, the management team at Hibbett Sports (HIBB – $54.90) made some rather curious remarks re: the web channel. It seems that, unlike EVERY OTHER RETAILER, the company is more concerned about their DC expansion and HQ move than addressing the transformational potential of the web channel.

HIBB management has done a remarkable job over the past 4-5 years greatly improving their level of profitability. Actually, an argument could be made that no one has done a better job than the folks at HIBB. But, the lack of strategic focus on what is likely to be the future of retail (web) needs to be noted.

Here is the transcript for two separate exchanges with sell-side analysts on the company’s Q4 2012 conference call:

Today, Hot Topic (HOTT – $13.89) agreed to be acquired by Sycamore Partners for about $600 million.

But, check out this rather suspicious series of events:

On January 2, 2013, HOTT reported its sales results for November/December 2012. Comp sales for the two month period increased +2.2%. Ok results. In the press release, HOTT management reiterated its previous Q4 2012 EPS guidance range of $0.23 to $0.27.

So far, so good. But, here’s where it gets interesting.

In the January 2, 2013 press release, HOTT management provided “initial” FY 2013 EPS guidance of “+30% to +35% over fiscal 2012 based upon a comp sales increase in the low-single-digit range.”

Given the company still had one more month to go in FY 2012, the management team’s offering of FY 2013 EPS and sales guidance was extremely odd and atypical, not just for HOTT, but for any specialty retailer. Also, many would argue that the EPS guidance was aggressive.

Then, on January 21, 2013, the company’s long-time CFO, Jim McGinty unexpectedly resigned. A subsequent SEC 8-K filing suggested that Mr. McGinty stepped down MINUS A SEVERANCE agreement. When was the last time a CFO left without severance?

Today, HOTT agreed to be acquired by Sycamore Partners for $14.00 per share (~$600M).

This raises a couple of issues:

• Did HOTT management issue “preliminary” FY 2013 EPS guidance on January 2, 2013 to ‘artificially’ boost the share price given discussions with potential buyers? Again, it’s rare that a retailer who had not typically provided annual EPS guidance to then issue annual EPS guidance even prior to the end of the current fiscal year.

• Did outgoing CFO McGinty have no interest in participating in the shenanigans of CEO Lisa Harper and simply quit cold turkey? Did he not want to (1) provide preliminary EPS guidance for FY 2013, and/or (2) provide preliminary FY 2013 EPS guidance that was incredibly aggressive and difficult to achieve? A look at the company’s Q4 2012 EPS guidance implied a dramatic slowing of the company’s EBIT margin improvement of late.
• If HOTT management truly expected to achieve its pie-in-the-sky scenario in FY 2013 (+30% to +35% EPS growth), why would HOTT want to sell at a mere $14.00 today, especially given the potential for even greater store growth at Torrid (the emphasis on strip centers was theoretically a winning strategy)? Did sales materially soften in February 2013 and spook HOTT management?

While we don’t know the answers to the above, it’s clear that the modest +75 Bps EBIT margin expansion in Q4 2012 versus LY represented a dramatic slowing of the company’s recent profitability improvement (+142 Bps in Q3 2012, +316 Bps in Q2 2012, +352 Bps in Q1 2012).

Actually, the +75 Bps EBIT margin expansion implied for Q4 2012 was likely materially boosted by the 53rd week… suggesting that our estimated +75 Bps EBIT margin improvement may even be inflated by the extra week. Click here to see our historical HOTT Earnings Model.

Yes, we agree that CEO Harper did a great job resurrecting the company and coming up with a differentiated strategy following the dismal performance of the company’s prior CEO. Reaching the company’s recent 4% EBIT margin level (FY 2006 through FY 2008) was an outstanding achievement.
 

But, the atypical preliminary FY 2013 EPS guidance and subsequent cold turkey resignation of the company’s CFO suggest a more interesting story behind the scenes.

For Sycamore Partners, this acquisition has all the markings of another Gymboree (disastrous acquisition “at the top” by Bain Capital in October 2010). Ironically, Ms. Harper may know the Gymboree “sell at the top” playbook all too well having previously been the CEO of the children’s apparel retailer until July 2006.