The U.S. online apparel retail market has been growing rapidly and a number of retailers including Urban Outfitters (NASDAQ:URBN) have thrived on this trend. Over the past five years, the company’s e-commerce revenues have grown at an average annual rate of about 25%.  Even during the recent weak holiday season and cold-struck first quarter, Urban Outfitters’ direct-to-consumer channel remained strong.
We expect this growth to continue driven by the booming online apparel industry, Urban Outfitters’ strong m-commerce (e-commerce through mobile) channel, effective marketing and a stable supply chain. Additionally, other initiatives such as increasing investments in technology, expanding web-based offerings and omni-channel retailing will also help.
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- How Has Urban Outfitters’ Revenue Composition Changed In The Last Five Years?
Online Apparel Industry Growth
With growing Internet usage, e-commerce has become one of the most popular shopping channels worldwide. Back in 1995, less than 0.5% of the world’s population used Internet. This figure grew to 39% by 2013.  The U.S. accounts for close to 34% of global e-commerce sales and online shopping constitutes about 11% (excluding groceries) of the region’s total retail sales.  Apparel and accessories (the second largest product category sold via Internet) alone has about 20% share in the overall U.S. online retail market.  eMarketer forecasts annual online apparel sales to increase from $45 billion in 2012 to almost $90 billion in 2016.  Urban Outfitters and other apparel retailers will benefit from this trend.
Urban Outfitters also operates few e-commerce websites in Europe where the outlook for online retail is very optimistic. According to Forrester, the region’s online sales are expected to grow at a compound annual growth rate of 11% for the next few years.  Given the trend in the U.S., we believe that online apparel sales growth in Europe will exceed overall online retail sales growth. Later this year, the company will also launch an e-commerce website in Japan. 
The direct-to-consumer channel constitutes about 40% to the company’s value according to our estimates.
Strong M-Commerce Channel
Due to the adoption of smartphones and tablets, mobile is emerging as an important shopping platform. Mobile commerce is a convenient way of shopping as people carry their mobile devices everywhere they go. About 29% of smartphone users in the U.S. have already used their mobile devices to shop online, and this percentage is likely to increase going forward.  Although m-commerce as a percentage of total online retail sales in the U.S. remains low, it has registered triple-digit growth in the recent years.  As a result, Forrester expects sales via smartphones to account for 9% of total online retail sales in the U.S. by 2017, up from 3% in 2012.  Bank of America estimates retail sales through smartphones and tablets in the U.S. and Europe to increase from $25 billion in 2012 to $67 billion in 2015.  Realizing this shift, the U.S. retailers have started to strengthen their mobile presence. According to a survey conducted in 2011, 78% of 200 retailers surveyed were planning to invest in the mobile channel. 
Urban Outfitters launched its m-commerce using Acuity’s eMAP platform in 2009, and has seen steady growth since.  Over the course of time, the company launched several websites, videos and apps, and promoted them through its print catalogs.  Its mobile ad campaign played a vital role in the direct channel’s 44% growth during the last year’s weak holiday season.  Sales transactions through this channel increased by 100% during the quarter. Even during Q1 fiscal 2014, mobile sales transactions almost doubled and the conversion rate of mobile sessions improved by 56 basis points.  Encouraged by these results, the retailer plans to launch a mobile app for its Anthropologie brand in fiscal 2014. M-commerce has also become critical for Urban Outfitters’ omni-channel retailing, as multichannel customers tend to spend three times than single-channel customers. 
Initiatives To Bolster Online Shopping
Urban Outfitters is looking to strengthen its e-commerce channel by undertaking a number of initiatives. The company is increasing its investments in fulfillment capabilities and technological advancements. It’s also focusing on creative catalog designs, seasonal product offerings, increased product categories and web-based exclusive products. In Q1 fiscal 2014, Urban Outfitters expanded its product assortments by almost 46%, which yielded good results. Its Free People’s intimate apparel line saw healthy growth and now contributes over 15% to the brand’s e-commerce revenues.  Last year, Urban Outfitters’ web launch of Anthropologie petites garnered excellent customer response and forced the retailer to test the product in its stores. Additionally, the pick, pack and ship initiative, which allows the fulfillment of web orders with inventory from the nearest located store (omni-channel retailing), also helped the company. Evidently, orders worth $12 million might have been cancelled in Q4 fiscal 2013 had there been no such service. 
As a result of these efforts, Urban Outfitters noticed a 20% increase in web traffic during the first quarter of the new fiscal year. We believe that these initiatives will continue to play a crucial role in driving the retailer’s e-commerce growth.
Focus On Marketing
In order to elevate its brand image, Urban Outfitters is reinforcing its data analytics team to make customer communication more actualized. Over the long run, the retailer plans to reduce its catalog circulation and promote web-based and digital communication.  Also, it is increasingly investing in image makers, marketers and stylists to conceive a fascinating brand experience for its customers. Once such example is FP Me by Free People brand, which allows customers to create online profiles, connect with fashion lovers and share various styles & collections’ photos.  Additionally, Urban Outfitters is making some tweaks to merchandise, design, and marketing teams, and increasing the head count of marketing and customer analytics. These efforts are indicative of the retailer’s strategy to build strong company-customer relationship, which should positively impact its online sales.
Stable Supply Chain
Urban Outfitters has a diverse supply chain with over 4,100 vendors globally. No single supplier accounts for more than 10% of merchandise purchased by the company.  This helps the company prevent inventory surplus and shortage issues in the event a vendor fails to comply with the delivery dates. Also, this grants Urban Outfitters a strong negotiating power over its vendors, as loss of any one supplier will not have a material effect on the retailer’s business. 
In order to remain responsive to changing trends and avoid superfluous inventory, Urban Outfitters is looking to reduce its inventory turnover. It recently implemented a new technology that allows a single view of inventory across all the channels.  The retailer believes that this initiative provides an opportunity to substantially reduce the lead time. Urban Outfitters is also testing different supply chain, brand design and communication initiatives that will help it reduce the time between order placement and market delivery. If the company is able to successfully implement these strategies, not only can it improve its financial performance, but can also offer its customers the latest products in a timely manner.
Our price estimate for Urban Outfitters stands at $46, implying a premium of about 10% to the market price.Notes:
- Urban Outfitters’ SEC filings [↩] [↩] [↩]
- Internet Growth Statistics, Internet World Stats [↩]
- Ecommerce Sales Topped $1 Trillion for First Time in 2012, eMarketer, Feb 5 2013 [↩]
- US Online Retail Sales To Reach $370B By 2017, EUR191B in Europe, Forbes, Mar 13 2013 [↩] [↩]
- Retail Ecommerce Set to Keep a Pace Through 2017, eMarketer, Apr 24 2013 [↩]
- Urban Outfitters’ Q1 fiscal 2014 earnings transcript, May 20 2013 [↩] [↩] [↩] [↩]
- BII Report: Why Mobile Commerce Is Set To Explode, Business Insider, Jan 10 2013 [↩] [↩]
- Why brands should embrace m:commerce now, Biz Report, Feb 13 2013 [↩]
- M-Commerce sales via smartphones hit $8 billion in 2012, Internet Retailer, Jan 16 2013 [↩]
- Half of retailers say m- commerce is important to achieving strategic goals, Internet Retailer, April 25 2011 [↩]
- Apparel retailer Urban Outfitters goes from SMS to mobile commerce, Mobile Commerce Daily, Aug 25 2009 [↩]
- Urban Outfitters mobile-activates print catalog to drive sales, Mobile Commerce Daily, Feb 7 2012 [↩]
- Urban Outfitters bolsters holiday sales via targeted mobile campaign, Mobile Commerce Daily, Dec 18 2012 [↩]
- Urban Outfitters’ executive shares vision for in-store mobile commerce, Mobile Commerce Daily, Sept 29 2010 [↩]
- Urban Outfitters’ Q4 fiscal 2013 earnings transcript, Mar 11 2013 [↩] [↩]
- Introducing FP Me For Fashion Lovers Worldwide, Free People, Feb 21 2013 [↩]