Urban Outfitters (NASDAQ:URBN) operates its Anthropologie stores in the U.S., Canada and Europe. It is the third most important business segment for the retailer after its namesake stores and its direct-to-consumer business according to our estimates. Anthropologie offers products at higher price points as compared to Urban Outfitter’s namesake brand and hence generates higher revenue per square feet.
Anthropologie has a small scale presence with less than 200 stores in North America and Europe. While Urban Outfitters has continued the brand’s expansion, its revenue per square feet has come down, initially due to the recession of 2008-2009 and later because of an imbalance in women’s merchandise mix in 2011. Going forward, we expect the revenue per square feet to improve with improving economy and the retailer’s increased focus on women’s apparel business.
What Is Anthropologie Stores’ Business?
Anthropologie stores offer a unique and eclectic product assortment, which includes women’s casual apparel and accessories, home furnishings and a diverse array of gifts and decorative items. The brand provides specifically tailored merchandise and inviting store environment for women aged between 28 to 45 years, who perceive the brand as sophisticated and contemporary. This has enabled the company to carve a niche segment for itself in the apparel industry as most retailers target 18-24 age groups. Rather than advertising its products, Urban Outfitters tries to sell a lifestyle to its customers by creating a unique in-store shopping experience and through customer relationship management. This has enabled the brand to acquire a loyal customer base.
However, Anthropologie offers products at higher prices compared to Urban Outfitter’s other brands and operates with minimal promotional activities. This has resulted in a limited customer base of more affluent buyers. As Anthropologie is a premium priced brand, it is susceptible to economic downturns when people cut down their expenses.
How Has This Segment Evolved And What’s The Outlook?
Because of its higher price points, Anthropologie stores generate maximum revenue per square feet for Urban Outfitters. Additionally, a limited presence in the U.S. and international markets provides good scope for expansion. Despite this, the brand has struggled to keep up its growth in the past. In 2008, these stores generated $754 in revenue per square feet, and the figure came down to $744 in 2009.  This can be attributed to the slowdown in the U.S. economy, which led to decrease in transactions, lower units per transaction and lower average unit sales prices.
Urban Outfitters witnessed a strong rebound in 2010, when the revenue per square feet increased to $770.  However, this was followed by a drastic decline of 7% in 2011 due to an imbalance in Anthropologie’s women’s apparel product mix that led to surplus inventory. 
The merchandise issues were most profound in the women’s tops category especially in knits and sweaters, two of the highest contributors to Anthropologie’s women’s apparel business. To clear the slow moving inventories, the company had to usher large scale promotions for its merchandise, which significantly impacted Anthropologie’s average unit retail (AUR) prices. Among all of Urban Outfitter’s brands, Anthropologie was the worst affected by the inventory hangover. This, along with a disappointing spring season (received negative review from fashion critics), has weighed on the brand’s growth in 2012 as well.
Urban Outfitters is undertaking some important steps to address this issue, which should help it going forward. The retailer completely replaced the top level management of Anthropologie in November 2011, in order to improve its focus on the brand. Additionally, the company is aiming to add more balance across its product attributes to reach a broader spectrum of customers. These efforts are likely to yield positive results and facilitate slow recovery.
Our price estimate for Urban Outfitters stands at $38, implying a discount of about 10% to the market price.Notes: