Gap finished 12th in a study of 158 retailers' financial well-being.

Aéropostale and Urban Outfitters placed second and third respectively in Consensus Advisors’ annual Retailer Health Ratings.

Aéropostale Inc. and Urban Outfitters Inc. finished second and third, respectively, in boutique investment bank Consensus Advisors’ annual Retailer Health Ratings, a list dominated by vertically integrated brands.

This story first appeared in the June 14, 2010 issue of WWD. Subscribe Today.

In rankings based on healthy growth, asset utilization, pricing power and balance sheet strength, among other criteria, over a five-year period, snared the top spot for the second year in a row. The top 10 also included Wal-Mart Stores Inc. at number five, Coach Inc. at number seven, The Buckle Inc. at number eight, Guess Inc. at number nine and Lululemon Athletica Inc. at number 10. The other retailers in the top 10 were nonapparel stores.

The study, covering 158 retail firms spanning broadlines and apparel retailers as well as stores in sectors other than apparel, is set to be released Tuesday.

Michael O’Hara, chief executive officer of Consensus, said the study serves as a counterweight to less comprehensive financial metrics, such as same-store sales.

“We’re doing this because everyone has a love-hate [relationship] with comparable-store sales stats [which by themselves] are a shallow measure because they lack context,” he said. “Comps don’t tell you about the asset turns or the debt levels, or even whether a company is growing through good acquisitions or is shutting stores.

“If a retailer’s comps are up 6 percent, it could have been they had discounted like crazy,” O’Hara said. “Or they pumped new inventory into the stores and took on more debt. But comps won’t tell you that. We look at all kinds of things and put them in a single rating.”

According to O’Hara, Urban Outfitters received the number-three overall ranking because of its strong balance sheet even though the slower inventory turns on furniture in its Anthropologie stores pulled the asset utilization component down.

“Gap has a great balance sheet,” the ceo noted. “If you just look at the comps, you get a misleading picture. This is one of those exceptionally good and healthy retailers. Gap is number 12 overall out of 158. It has $2.5 billion in cash and no debt. Gap sales don’t fluctuate dynamically when the economy goes up and down relative to the other retailers. Our balance sheet [metric] suggests that Gap won’t be in trouble anytime soon regarding its ability to pay its bills. Its recent acquisition of Athleta has high growth prospects. Gap has a big market capitalization, giving it incredible resources if it wants to use stock to do an acquisition.”


Although American Eagle Outfitters’ margins and sales have been up and down, giving it a lower rank for pricing power, the teen retailer is still ranked 20th based on its balance sheet strength, second among the apparel retailers studied. American Eagle also scored high based on healthy growth and asset utilization.

“Most retailers are like American Eagle, good in many categories, but weak in others,” O’Hara said.

While the top 10 was packed with fashion merchants, Wal-Mart was the only mass merchandiser in the group. The TJX Cos. Inc. ranked 35th overall, “which is still very good as it is in the top 25 percent,” O’Hara noted. “It doesn’t turn inventory [at the same rate] as the vertically integrated brands, but it still has a strong balance sheet and good pricing power. Its margins are very steady.”

Ross Stores Inc. finished at number 31 overall.

Among retailers of apparel, The Wet Seal Inc. was ranked number one and Bebe Stores Inc. number two for inventory productivity, but wouldn’t perform as well if stacked up against supermarkets and grocery stores.

“No one turns inventory faster than grocery stores and Costco,” the ceo noted. “They have great asset utilization, but low margins. Women’s fashion turns quickly due to its seasonality, and high markups help with margins. If they don’t get the fashion right one season, they can clear it out via sales.”

O’Hara said the target audience for RHR is, “first and foremost, the board of directors. The benchmarking tools are such that a company can look at the things it does well in comparison to its peer group, and what it should do to improve or incentivize management for the next year. The [information] is also of use to investors, landlords, bondholders and anyone who needs to assess how a company is doing. Even factors are looking at it because they’re [concerned] about balance sheet strength to determine if a receivable is good or not.”

Doug Stebbins, managing director and the statistician at Consensus, who worked three years on the data from conception to final ranking, explained that the healthy growth component looks at sales growth over time, as well as the volatility of sales growth over time. Balance sheet strength takes into account factors such as access to liquidity, cash generated by the company and cash on the balance sheet. Asset utilization has two components, according to Stebbins: how well a retailer turns inventory into cash and how well it turns capital expenditures into cash. Pricing power focuses on how well a retailer canmaintain and increase its margins.


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