Specialty apparel retailer Urban Outfitters (NASDAQ:URBN) has done reasonably well during the last two quarters despite overall weakness in the industry. Driven by robust growth in its online channel, the company posted record holiday sales in Q4 fiscal 2013 even though the industry-wide apparel sales were disappointing. It also saw strong growth in Q1 fiscal 2014 despite the prolonged cold weather, thanks to the revival of its Anthropologie brand. We expect this momentum to continue as Urban Outfitters releases its Q2 fiscal 2014 results on August 19. Although the company discontinued a couple of apparel products towards the end of the quarter, we don’t expect any material impact on its earnings.
Anthropologie’s Growth Is Likely To Continue
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Anthropologie’s sales have suffered in the past due to inventory hangover. The surplus inventory resulted from an imbalance in women’s apparel product mix, especially in knits and sweaters, which were the main product categories for the brand. However in Q1 fiscal 2014, its comparable store sales improved by almost 8% underscoring its recovery.  To better manage its inventory, Urban Outfitters has launched a new technology that allows a single view of inventory across channels, which helps it to reduce the time between order placement and market delivery. 
The retailer has shifted Anthropologie’s focus from preppy and quirky look to much softer and sensual feminine looks. It added unconventional and artistic Bohemian styles to its products that resonated well with the customers.  It also added more product categories such as weekend casuals and dinner wear to encompass the entire apparel needs of its customers. As a result, its regular price brand comparable sales grew in double digits.  This is an encouraging sign given that Anthropologie’s products are relatively expensive and U.S. consumer spending was weak in the first quarter. In addition, last year’s web launch of Anthropologie’s petites received good response, and encouraged Urban Outfitters to test the product in its stores.  We expect the brand to see another good quarter and find further support from improved customer demand due to better weather conditions.
Online Business Will Lift The Results
The direct-to-consumer business (mainly includes the online channel) has been the strongest growth driver for Urban Outfitters and accounts for roughly 45% of its value according to our estimates.  The channel’s growth remained high in Q1 fiscal 2014 as the web traffic rose by 20% backed by improving technology, seasonal and web-exclusive products, creative designs and omni-channel retailing.  Sales transactions through mobile devices grew by about 100% in Q4 fiscal 2013 and doubled during the first quarter of fiscal 2014.  The conversion rate of mobile transactions also improved by 56 basis points. There is no doubt that the online retail market is growing rapidly and Urban Outfitters is strongly capitalizing on this growth. We expect the company to carry this momentum in the second quarter.
The retailer’s focus on marketing through catalog circulation, digital communication and actualized customer interactions will also help. The company already operates a strong supply chain to support its direct-to-consumer channel, and has over 4,100 vendors with no single supplier accounting for more than 10% of its inventory. 
Product Pull Back Will Not Have A Material Impact
Towards the end of the quarter, it was pointed out that Urban Outfitters was using a logo on its shirt that resembled the United Farm Workers (UFW) of America logo.  Since the retailer had no proper authorization to use the logo, it risked facing legal actions from the UFW and immediately decided to remove these shirts from its stores. Additionally, it also discontinued another apparel product “Vanguard Pitchfork Tee” as its logo resembled the gang symbol of a Chicago street gang.  The discontinuation of these apparel products will not have any material impact on the company’s results.
Our price estimate for Urban Outfitters stands at $46, implying a premium of about 10% to the market price.Notes:
- Urban Outfitters’ Q1 fiscal 2014 earnings transcript, May 20 2013 [↩] [↩] [↩] [↩] [↩] [↩]
- Urban Outfitters’ SEC filings [↩] [↩]
- Urban Outfitters’ Q4 fiscal 2013 earnings transcript, Mar 11 2013 [↩]
- Urban Outfitters Allegedly Uses United Farm Workers of America Logo Illegally, Huffington Post, Aug 5 2013 [↩]
- Urban Outfitters Pulls T-Shirt With Resemblance To Infamous Chicago Gang Symbol, Huffington Post, Jul 18 2013 [↩]