Urban’s Women’s Business Zaps Margins, Focus Needed for Recovery

by Trefis Team
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URBN
Urban Outfitters
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Urban Outfitters (NASDAQ:URBN) posted disappointing quarterly results with Q4 margins declining by a massive 9.5 percentage points due to increased markdowns to clear slow moving women’s apparel inventory at Anthropologie and Urban Outfitters. [1] Additionally, the company also seemed a bit misplaced in its strategy going ahead. Despite continuing issues with its women’s merchandise which warranted immediate attention, the company remained intent on adding more stores despite continued weak results, a move which didn’t bode well with the market expectations. Urban Outfitters competes with other specialty retailers such as Ann (NYSE:ANN), Aeropostale (NYSE:ARO) as well as Gap (NYSE:GPS) and Abercrombie & Fitch (NYSE:ANF).

Check out our complete analysis of Urban Outfitters

Women’s Biz Takes Toll on Urban’s Margins

The ailing women’s apparel business has been a major source of concern for Urban Outfitters throughout 2011. Though sales trends looked promising in the beginning of holidays indicating a potential turnaround, increased markdowns to clear slow moving women’s apparel inventory eventually took a toll on Urban’s margins. While a decline in margins was anticipated due to a promotional holiday season, the drop of 9.5 ppts. was far deeper than what most analysts had expected.

Additionally, the declining trend in women’s business seems to be stretching in the spring season too. In a recent survey by RetailSails, the company maintained that women’s product at both Urban and Anthropologie continues to be challenging with respect to both price points and selection. [2]

However, a reduction in inventory levels should provide some tailwinds to Urban’s margins this quarter. Taking a cue from Urban’s current inventory levels, we expect Urban to start benefiting the decline in cotton prices by the second half of 2012.

Urban’s Strategy Going Ahead Fails to Impress Market

Despite a continuous weak performance in women’s apparel business which warrants immediate attention, there wasn’t much update on this front from Urban Outfitters. Instead, the company seemed more focused on adding more stores rather than rectifying the ongoing issues with its women’s merchandise.

We believe the move is misplaced because the strategy of increasing store count to boost sales despite pending merchandise issues reflects more of a desperate action by Urban to focus on its top-line growth rather than making sure than focusing on its apparel and margins which are the biggest sources of concern.

We are currently in the process of revising our $29.56 price estimate for Urban Outfitters, which is at a premium of 6% to its current market price.

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Notes:
  1. Urban Outfitters reports Q4 results, Source: Urban Outfitters’ IR []
  2. RetailSails Urban Outfitters survey, Source: RetailSails, Date: 3/09/12 []
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