Urban Outfitters Earnings Preview: Expect Slower Growth Than Previous Quarters

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URBN: Urban Outfitters logo
URBN
Urban Outfitters

Urban Outfitters (NASDAQ:URBN) is one of the few apparel retailers in the U.S. who have performed well during the last three quarters despite the edgy retail environment. Backed by its online channel and strong brands (its name-sake store chain and Anthropologie), the company posted record holiday sales last fiscal fourth quarter (ended January 31st, 2013), even though industry-wide apparel sales were disappointing. The company sustained its growth momentum during the first two quarters of fiscal 2014 as well, when tepid economic growth in the U.S. troubled several retailers.

Although Urban Outfitters has registered strong growth in the past, its momentum, in our view, will likely have slowed in the results the company posts for Q3 fiscal 2014 on November 18th. Contributing to such a slow down would be a weak retail environment that has resulted from a change in consumer spending patterns. A couple of months ago, the company itself stated that its comparable store sales in the third quarter were rising only by mid-single digits, compared to 9% growth observed in the previous quarter. [1] Nevertheless, we still expect positive growth for the company as it has remained resilient to the industry weakness in the past. The retailer’s customers have shown good affinity to its products and its direct-to-consumer growth has been strong and steady. These growth fundamentals are likely to offset the impact of the prevailing weakness in the U.S. apparel industry.

Our price estimate for Urban Outfitters stands at $44, implying a premium of about 10% to the market price.

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See our complete analysis for Urban Outfitters Inc.

Edgy Retail Environment Will Hinder Growth

The U.S. apparel retail market has been particularly weak this year due to cautious consumer spending and change in spending patterns. Due to the impact of payroll tax increase, slow job growth, gasoline price increases and higher healthcare costs, U.S. buyers have been extremely watchful of their spending on discretionary products. Moreover, a percentage of consumers have started diverting their spending to cars and houses to take advantage of the low interest rates. Subsequently, they are holding back on other products such as apparel and accessories. This resulted in a weak back-to-school season for apparel retailers. According to a National Retail Federation survey conducted at the start of the season, average spending by families with school and college students will decrease by almost 8% during the period of mid-July to mid-September, as compared to the same period last year. The survey found that eight out of every ten shoppers were planning to lower their spending. About 76% of the college shoppers said that they will spend less this season and 37% said that they will shop only during the discount sales. Interestingly, around 45% shoppers were planning to use their previous year’s products rather than shopping again. [2]

As a result, U.S. retailers have relied on deep discounts to win back customers, which has weighed heavily on their growth and profitability. According to the Commerce Department, retail sales in August (excluding the automotive sector) increased by just 0.1%. In September, several apparel retailers, such as Gap Inc (NYSE:GPS), Zumiez Inc, The Buckle Inc and American Apparel Inc, posted comparable store sales declines. Moreover, retailers registered only a modest growth in October due to slow job growth, low consumer confidence and warmer than usual temperature that impacted the demand for cool weather apparel. [3] Although Urban Outfitters has been resilient to the edgy retail environment historically, we expect it to reflect the negative impact this quarter.

However, The Company’s Brands Have Remained Strong

The U.S. buyers have shown low brand loyalty as they have been readily shifting to brands that provide relevant fashion at affordable prices. This trend has become more profound lately due to the prevailing economic weakness, which has encouraged shoppers to look for cost saving options. Urban Outfitters has been successful in responding to this trend as its offerings have resonated well with its teenage customers. The company’s namesake brand associates itself with preppy looks by offering edgy products that hold good appeal for teenage buyers. Over the last three quarters, the brand’s comparable store sales have grown by 5%,6% and 11% respectively.

Moreover, Urban Outfitters’ Anthropologie brand has improved considerably after a dismal 2012. The company achieved this turnaround by doing a complete product overhaul for Anthropologie,–shifting the theme from preppy and quirky to more soft, sensual and feminine looks. The brand’s customers responded positively to this change, which helped Urban Outfitters generate more regularly priced and fewer discount sales. This resulted in Anthropologie’s comparable store sales jumping by 8% and 9% respectively in first two quarters of fiscal 2014. We believe that Urban Outfitters can maintain this growth momentum in the third quarter, which will help it offset the impact of weak retail environment.

E-Commerce Growth Will Also Help

Urban Outfitters’ direct-to-consumer business accounts for about 24% of its revenues and has been growing at a rapid pace. Over the past four years, the retailer’s direct revenues have increased at an average annual rate of 25% driven by growing popularity of online shopping and Urban Outfitters’ strong brand recognition. The company’s mobile commerce platform, several mobile apps, technological advancements and web-exclusive products have also aided this growth. Interestingly, Urban Outfitters’ direct revenues increased by a staggering 44% during the last year’s weak holiday season. Since this channel has done well historically, we expect it to remain the key driver for the retailer during this quarter.

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Notes:
  1. Urban Outfitters Slumps After Third-Quarter Sales Outlook, Bloomberg, Sept 11 2013 []
  2. On The Heels To Historically High Back-To-School Season, 2013 Spending Expectations Decrease, National Retail Federation, Jul 18 2013 []
  3. Warm october could hinder fall retail sales, Yahoo Finance, Oct 8 2013 []