Lifestyle specialty retailer Urban Outfitters (NASDAQ:URBN) reported a record growth of 12% in its Q3 fiscal 2014 revenues, fueled by strong brand performances and surge in Direct-to-Consumer sales. The retailer’s comparable store sales increased by 7% with 13% growth at Anthropologie, 30% growth at Free People and 1% decline at Urban Outfitters. While Urban Outfitters has done well over the past several quarters, its growth slipped in Q3 due to missed fashion calls and promotional retail environment. However, we believe that the brand can come out of this temporary weakness, as it has done well in the past. The retailer’s Anthropologie brand posteded a healthy growth rate during the quarter with its appealing product offerings and shopping experience. The Direct-to-Consumer channel played a key role in driving Urban Outfitters’ Q3 comparable store sales and we believe that it will continue to do so in the future.
Our price estimate for Urban Outfitters stands at $43, implying a premium of about 10% to the market price.
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Urban Outfitters’ Growth Stumbled
Urban Outfitters’ namesake brand comparable store sales declined by 1% in Q3 after recording positive growth for the past several quarters. The company attributed this performance to missed fashion calls, off-pitch marketing and poor creative execution. The brand is mainly about distinct shopping experience and eclectic fashion offerings. Urban Outfitters feels that it did not leverage these two factors as strongly as it did last year. The main contributor to the decline was women’s pants, where the fashion changes failed to attract customers and the company miscalculated the demand. Moreover, Urban Outfitters was too aggressive with certain men’s products, which did not drive enough store traffic.  Apart from missed fashion, highly promotional environment and intense competition from H&M and Forever 21 led to an increase in the number of markdowns.  Ultimately, this weighed on the brand’s comparable store sales growth.
Urban Outfitters is planning conservatively for the holiday season as it does not expect the brand to bounce back in the near term. However, we believe that it can recover in the longer run since Urban Outfitters’ edgy and quirky products have resonated well with its teenage customers in the past. Despite the prevailing weakness in the U.S. apparel industry, the brand’s comparable store sales have grown by 5%,6% and 11% respectively in the preceding quarters.
Anthropologie Keeps Getting Better
Urban Outfitters’ Anthropologie brand has witnessed a turnaround in the recent past after struggling through most of 2012. During the recently concluded quarter, the brand’s comparable store sales surged by almost 13%, following 8% and 9% grown in the preceding quarters. 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 discounted sales. Anthropologie continues to expand its collection of petite apparel, which was launched a while back. During the quarter, the petite business more than doubled as compared to last year. 
Moreover, Anthropologie’s inventory control has been strong which has allowed it to remain inline with the prevailing fashion trends. We believe that the brand’s growth will continue in the future as it introduces better products for its women customers’ daily and occasional needs. Anthropologie combines its product presentation with storytelling, which enhances its brand appeal and drives greater store traffic. 
E-Commerce Channel Helped Comparable Store Sales Growth
In addition to store sales, robust growth in the Direct-to-Consumer business also fueled Urban Outfitters’ 7% comparable store sales growth. The channel’s growth was propelled by 7% rise in web traffic, 34 basis points improvement in conversion rate and an increase in average order value. We believe that this growth will continue in the future as the retailer is making several efforts to boost this channel to take advantage of the booming online apparel demand.
Since mobile devices accounted for the largest proportion of the increased transactions, Urban Outfitters is focusing more on its mobile channel. During the quarter, the company launched a generation 5 iphone app known as Urban On for its namesake brand. This app enables the company to engage its customers by leveraging their likes such as exclusive access to rewards and events. This also allows customers to interact with the Urban Outfitters community by utilizing social media channels. The company stated that more than 370,000 customers have downloaded this app over the last few weeks. 
Towards the end of October, the retailer launched the first phase of Urban Outfitters site redesign, which is focused on improving product presentations. The new design emphasizes on-story presentations on the home page and gateway pages, as well as scaling of website across different screen sizes. Urban Outfitters believes that through adoption of new technological features, it is well positioned to enhance the customer shopping experience. The retailer also launched Anthropologie’s refreshed website, which improved the visuals considerably and contributed to the brand’s growth.Notes:
- Urban Outfitters’ Q3 fiscal 2014 earnings transcript, Nov 19 2013 [↩] [↩] [↩] [↩]
- Urban Outfitters Blames Drop In Sales On “Missed Fashion Calls’ and ‘Off-Pitched Marketing’, Business Insider, Nov 19 2013 [↩]