Quiksilver, Inc. (ZQK), Urban Outfitters, Inc. (URBN): Is This California-Inspired Brand the Way to Play Teen Retailing?

A better idea
Given Quiksilver, Inc. (NYSE:ZQK) and Tilly’s somewhat narrow focus on the active-sports subset of the teen segment, investors might find better returns with the more diversified, best-of-breed player in the teen segment, Urban Outfitters, Inc. (NASDAQ:URBN).  The company targets the teen crowd with its namesake stores that offer an eclectic mix of apparel, accessories, and home wares.  It also enhanced its vertical integration with its 2002 introduction of the Free People brand of value-priced women’s apparel, which is sold in its stores, as well as through a wholesale network of 1,400 independent stores.

In FY2014, Urban Outfitters, Inc. (NASDAQ:URBN) has generated double-digit increases in revenue, aided by a high single-digit gain in comparable-store sales and a further expansion of its retail-store base.  More importantly, the company’s higher gross margin, due to reduced markdowns, stands in stark contrast to the negative effect that discounting has had on Quiksilver’s gross margin. The net result is that Urban Outfitters, Inc. (NASDAQ:URBN) generates strong operating cash flow, $396 million in its latest fiscal year, which it can use to build inventory for additional store expansions or can return to shareholders through dividends and share repurchases.

The bottom line
Quiksilver’s name still has selling power among its teen cohort, as judged by the growth of Tilly’s business, where Quiksilver is one of its important brand partners.  However, Quiksilver has a significant debt load, over $800 million at last count, and generates a level of operating cash flow that is insufficient to support its current capital expenditure needs. Until the company is able to shore up its financial position and produce consistent operating income, investors should stick with Urban Outfitters, Inc. (NASDAQ:URBN) in the teen retail sector.

The article Is This California-Inspired Brand the Way to Play Teen Retailing? originally appeared on Fool.com is written by Robert Hanley.

Robert Hanley owns shares of Quiksilver and Urban Outfitters. The Motley Fool recommends Urban Outfitters.

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