While we don’t cover AAPL as closely as many of the retailers that we follow, we have put together a robust set of earnings analytics based upon company disclosures in SEC filings and quarterly conference calls. See our updated company Data Packet following the research note. Click to Open PDF

AAPL should again easily exceed the consensus sell-side EPS expectation in Q1 2011 (December 2011). In our view, GPM% upside versus consensus expectations appears to be the largest driver of material EPS outperformance versus today’s consensus sell-side estimates.

Why? GPM% pressures began to ease in Q3 2010 (June 2011) as the company fully lapped its iPad launch (i.e. today, iPad sales mix has become much less of an issue).

Also, keep an eye on Product Warranty Accruals. Per SEC filings, AAPL’s Product Warranty Accruals (see table below) have greatly out-stripped the actual Product Warranty Costs for the past 5 fiscal quarters. AAPL may receive a GPM% boost if Product Warranty accruals are scaled-back versus the prior year (relative to sales growth).

The major concern is whether GPM% will materially decline from the impact of recently reduced price points on iPhones and iPods and the stronger U.S. Dollar. Therefore, our GPM% expectations beyond Q2 are for AAPL’s reported GPM% to decline versus the prior year.

In Q1 2011 (Dec 2011), we’re forecasting EPS of $10.83 versus the current consensus sell-side estimate of $10.05. Our estimate implies revenue growth of +49.1%, a +350 Bps GPM% versus LY, and a +421 Bps EBIT margin improvement versus LY.

Yesterday, Urban Outfitters (URBN – $29.41) CEO Glen Senk announced his departure. But, his recent strategic decisions left us scratching our head and his departure was long overdue. click here for a recent research note

In our view, Mr. Senk’s tenure will be marked by the ridiculous statements he made to the institutional investor community. For example, a few years ago, he suggested that URBN would eventually deliver 25% to 30% EBIT margins. That was never going to happen, good economy or bad.

Also, who could forget the following:

At the ICR Conference in January 2011, Mr. Senk suggested that the Anthropoligie catalog in March 2011 was “one of the top 5 best” that he had seen at the chain.

At the ICR Conference in January 2011, Mr. Senk suggested that the company was planning for a “higher merchandise margin” in FY 2011 than LY. Also, Mr. Senk suggested that the sourcing environment was “easier” on URBN than others because URBN is not “boxed into low prices and cotton.” In addition, URBN has “never been in low-cost factories.”

On the Q2 2011 conference call in August 2011, Mr. Senk was “anticipating gradual improvements” in the company’s comparable sales and financial improvements “over the balance of the year and into Spring 2012.”

On the Q2 2011 conference call in August 2011, Mr. Senk boldly suggested that “I did just look at the Spring finalization and I have to say, and Eric is probably going to kick me, but I think it is some of the best product I have seen at Anthropologie in a long time.”

We know what happened to each of these bold statements above and they did not reflect well on Mr. Senk’s ability to provide a peek into the company’s financial future.

Those are just a few examples. But, we believe that Mr. Senk’s exit was largely a function of the following.

In August 2011, Mr. Senk made the following statements on the company’s Q2 2011 conference call:

“We have begun to enhance our merchant organization by splitting the creative and operational functions, thereby unencumbering creativity.”

“I think the organization has absolutely embraced the concept of taking risk.”

The ‘splitting’ of creative and operational functions and the embracing of merchandising ‘risk’ had the potential to be an absolute disaster and it appears that is exactly how it played out. URBN had a long history of operational discipline and the above strategic shift likely exacerbated the company’s recent merchandise margin woes.

Many times, Mr. Senk reminded investors that merchants were eternal optimists. That’s true. But, it’s imperative that a retailer has a strong merchandise planning and allocation (MP&A) team to provide the guardrails to ensure operational discipline.

Mr. Senk’s desperate Hail Mary (splitting creative/operational functions) is likely to reason for his sudden departure today. But, investors in URBN should be saying good riddance.

New CEO Ron Johnson has a monumental challenge staring him in the face at J.C. Penney (JCP – $33.05). The problem is that it’s going to get much worse before it gets any better.
(Click here to view TRG’s latest research note on JCP)

Departing CEO Mike Ullman should have been replaced much sooner. A glance at the below trailing 4-quarter EBIT margin rates for both JCP and M highlight the relatively miserable financial performance JCP delivered under Mr. Ullman’s watch, especially the past 2-3 years. Note: JCP’s numbers excluding lower Pension Expense over the past 6 quarters would look even worse than what is depicted below.

Mr. Ullman’s ridiculous suggestion on the Q2 2011 conference call that its “identified growth initiatives” are performing double digits ahead of last year should be investigated by the SEC. This statement by an outgoing CEO is an affront to the company’s investors and a black eye to Mr. Ullman as he prepares to leave the company.

JCP Q2 2011 Conference Call – August 12, 2011 – CEO Mike Ullman

“Our identified growth initiatives – Liz Claiborne, Sephora Inside J.C. Penney, our tops business, modern shoes and handbags, fast fashion, Modern Bride, fine jewelry, housewares, and center core – are performing double-digit ahead of last year.”

JCP management can talk about improving the “center core” of the store and its various “growth initiatives” all they want. But, the company’s comp store sales results in the past 3-4 years have come up well short of its peer group.

We’re well below the consensus in Q4 2011 as 2-year profitability comparisons materially toughen. In the long run, incoming CEO Ron Johnson may be able to provide a needed spark to get this ship moving in the right direction. Let’s face it, the proverbial ‘bar’ has been set extremely low by his predecessor.

But, it’s going to get much uglier before investors begin to see tangible signs of hope. How plans on delivering EPS north of $1.60 next year is beyond us ($2.04 current consensus estimate).

Occasionally, TRG will post a relatively current research note on Retail Geeks. Here’s a recent note we published on AAPL ahead of the company’s earnings release on Tuesday afternoon.

Apple (AAPL – $357.77) will again easily exceed the consensus sell-side EPS expectation in Q3 2010 (June 2011). In our view, GPM% upside versus consensus expectations appears to be the largest driver of material EPS outperformance versus today’s consensus sell-side estimates.

Why? GPM% pressures ease in Q3 2010 (June 2011) as the company has now fully lapped its iPad launch (i.e. sales mix is much less of an issue this quarter than the prior 4 quarters). iPad revenues are likely to double in Q3 versus LY, but so will the higher margin iPhones.

Also, keep an eye on Product Warranty Accruals. Per SEC filings, AAPL’s Product Warranty Accruals (see table below) have greatly out-stripped the actual Product Warranty Costs for the past 3 fiscal quarters. AAPL may receive a GPM% boost beginning in Q4 (if not earlier) if Product Warranty Accruals are scaled-back versus the prior year.

While GPM% should be much stronger than consensus expectations, we’re concerned about the top-line. There was no iPhone launch in June 2011 to lap last year’s launch of iPhone 4. Therefore, Q4 (September 2011) will not receive a material top-line boost via a product launch this year as it did last year.

In Q3 2010 (June 2011), we’re forecasting EPS of $6.29 versus the current consensus sell-side estimate of $5.80. Our estimate implies revenue growth of +59.3%, a +175 Bps GPM% versus LY, and a +395 Bps EBIT margin improvement versus LY.

In Q4 2010 (Sept 2011), we’re forecasting EPS of $6.84 versus the current consensus sell-side estimate of $6.42. Our estimate implies revenue growth of +32.8%, a +375 Bps GPM% versus LY, and a +451 Bps EBIT margin improvement versus LY.

See link for the full research note and an updated EPS model and company Data Packet.

Talbots (TLB – $2.53) reported another in a string of disappointing earnings results this week. Nothing new here. Over a year ago, we suggested that we thought TLB’s BPW acquisition was a disaster waiting to happen.

But, the company’s quarterly earnings conference call this week provided yet another example of the company addressing relatively short-term concerns and ignoring a bigger issue… the company’s bloated average store size.

First, let’s take a look at a few of CEO Trudy Sullivan’s ridiculous comments from this week’s conference call:

Apparently, Ms. Sullivan may not have actually looked at the financial results for Q1 2011 and the company’s guidance for Q2 2011. These sort of Mr. Magoo-like comments from her just make you scratch your head.

As if that was not enough spin doctoring above, Ms. Sullivan finally suggested on the conference call that, “I feel very, very optimistic about the corrections we have made to the product as we ramp into the back half.”

Therein lies the problem. Ms. Sullivan and TLB have a long track record of promising improved performance in the future. Yet, it never seems to appear.

The stock price today is a far cry from the $13.00+ per share level that was seen just prior to the acquisition of BPW (a SPAC) over a year ago. How this management team remains employed is beyond us.

In our view, the unveiling of a Three-Year Strategic Plan (October 2010) was nothing more than an attempt to “buy time” to stay employed for the next 12-24 months before investors recognized that the emperor had no clothes (literally). How Ms. Sullivan remains employed today is beyond us.

So, when Ms. Sullivan is finally shown the door, how can TLB be salvaged?

The elephant in the room is the company’s bloated store size. There is a reason that CHS has historically delivered much stronger levels of profitability than TLB and CWTR (good grief, another CEO that needs to exit stage left). CHS has an average store size that is less than half the size of TLB/CWTR.

The fact is that TLB’s store size (7,000+ square feet) worked well 10-15 years ago when there was less competition.

TLB management needs to think bigger than simply fixing the knit/sweater categories (apparently, the only problem today according to TLB management). Closing stores is a step in the right direction, but right-sizing the core chain’s square footage is a strategic thought process that is being missed by the current management team.

Why is TLB management not addressing the most important issue facing the core chain today (square footage rationalization)? Unfortunately, TLB management is trying to fix a “new age” problem with “old school” thinking.

Clearly, TLB management believes that a tweak to the product will turn things around (i.e. old school). But, the company will need to think bigger and address its real estate conundrum if the company wants to remain a viable entity in the years ahead. Otherwise, Ms. Sullivan’s “small” thinking is likely to produce a “big” flirtation with Chapter 11.

In fairness, Ms. Sullivan is faced with a dilemma that many CEOs in retail are grappling with today. Most retail CEOs are trying to continue selling a growth story to investors. But, many of these CEOs are putting the long-term viability of their companies in jeopardy by not addressing the “bigger” issues of the day.

Certainly, it’s less ‘sexy’ to tell the investment community that you’re embarking on a program to lower your average store size and rationalizing square footage by -25%. But, in the Internet age, many of these chains should be more focused on their web site and less focused on maintaining a chain’s historical box size.

Ms. Sullivan’s seeming desire to consistently satisfy the short-term investment community (quarterly spin doctoring) is getting in the way of addressing a longer-term problem for the core chain. If she (or, the next CEO) does not start to address what really ails the company (bloated square footage), she’ll continue to put the future of the company in jeopardy.