Urban Earnings: Can Online Sales Offset The Long Winter’s Chill?

by Trefis Team
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Upside
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Trefis
URBN
Urban Outfitters
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Quick Take

  • Urban Outfitters will release Q1 fiscal 2014 results on May 20.
  • The direct-to-consumer channel will continue to drive the retailer’s results aided by several new initiatives. The company has seen robust growth in its mobile channel as well which is likely to continue.
  • However, the prolonged cold weather in the U.S. might have a negative impact on Urban Outfitters’ spring clothing sales.

Urban Outfitters (NASDAQ:URBN) is scheduled to release its Q1 fiscal 2014 earnings on May 20. [1] We believe that while the strong direct-to-consumer (online) channel will continue to be the primary growth driver, the unusually cold weather in the U.S. could weigh on the results. The longer term outlook looks better as Urban Outfitters has been actively investing in boosting its online sales. This business generates significantly higher margins than the retailer’s other businesses, and constitutes roughly 40% of its value.

See our complete analysis for Urban Outfitters Inc.

Strength In Direct-To-Consumer Business Will Help

Despite the weak holiday season last year, Urban Outfitters posted healthy results mainly due to the growth in its direct-to-consumer business. During the holiday quarter, the retailer registered a staggering 44% increase in direct-to-consumer revenues. [2] This growth can be attributed to increased investments in fulfillment capabilities, technological advancements, creative catalog designs, seasonal products offerings, increased product categories and web-based exclusive products. [3] [4] We expect the momentum to continue this quarter as well.

Additionally, the pick, pack and ship initiative, which allows the fulfillment of web orders with inventory from the nearest located store, will also help. This service enables the company to quickly respond to online orders and also helps prevent cancellation. The retailer estimates that in Q4 fiscal 2013, orders worth $12 million (6% of total direct sales) might have been cancelled without pick, pack and ship. [4] Urban Outfitters’ mobile channel has also witnessed robust growth, and we see no reason for it to slow down. Sales transactions through the mobile channel grew by 100% during last quarter. [4] Overall, we believe that Urban Outfitters’ direct-to-consumer channel is well-poised to drive growth in Q1 fiscal 2014.

The direct-to-consumer business constitutes about 40% of  Urban Outfitters’ value as per our estimates.

However, The Prolonged Cold May Have A Mitigating Impact

For the spring season, Urban Outfitters launched a wide range of products such as patterned bikinis, high waist denim shorts, skirts and dresses. All of these items resonate well with the customers during warmer climate. However, winter in the U.S. this year persisted longer than usual and March was the coldest in the last 17 years. [5] This resulted in lower demand for spring clothing. For instance, the demand for shorts during the fourth week of March fell by 12% compared to a year ago. [5] Due to the prolonged cold, a number of retailers such as Jones Group (NYSE:JNY) faced problems, and we expect this to offset Urban Outfitters’ growth as well.

Our price estimate for Urban Outfitters stands at $43, which is slightly below the market price.

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Notes:
  1. Urban Outfitters’ Investor Relations []
  2. Urban Outfitters’ SEC filings []
  3. Urban Outfitters’ Q3 fiscal 2013 earnings transcript, Nov 19 2012 []
  4. Urban Outfitters’ Q4 fiscal 2013 earnings transcript, Mar 11 2013 [] [] []
  5. Prolonged Winter Puts Retail Sales in Deep Freeze, CNBC, March 31 2013 [] []
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