Urban Outfitters Is Likely To Emerge As A Winner This Holiday Season

While most U.S. apparel retailers have stumbled in the edgy retail environment, lifestyle specialty retailer Urban Outfitters (NASDAQ:URBN) has remained resilient. During the last four quarters the company has registered healthy growth backed by its strong brand performances and robust growth in its direct-to-consumer business. At the same time established players such as American Eagle Outfitters (NYSE:AEO), Abercrombie & Fitch (NYSE:ANF) and Aeropostale (NYSE:ARO) struggled to even match their previous year’s levels.

We believe that Urban Outfitters is positioned well enough for a good holiday season, which is expected to see its weakest gains since 2009. The company’s main brands – Urban Outfitters and Anthropologie – have been performing well so far and are likely to continue this way. Urban Outfitters’ direct-to-consumer channel has been growing at a robust pace and with the recent mobile investments, it is likely to sustain this momentum during the holiday season.

Our price estimate for Urban Outfitters stands at $43, implying a premium of about 20% to the market price.

See our complete analysis for Urban Outfitters Inc.

The Holiday Season Will See Its Weakest Gains Since 2009

According to an early forecast by ShopperTrak, the holiday season this year will see its weakest gains since 2009 on account of cautious consumer spending, a shorter season, and a change in shopping trends. Retail sales in November and December are expected to rise by just 2.4% while they improved by 3% last year and 4% in 2011 and 2010 for the same period. Moreover, store traffic is likely to fall by almost 1.4%. This is not a pleasing picture given that last year’s holiday season remained weak despite a 2.5% increase in store traffic. ^[1]

U.S. buyer sentiment is still weighed down by political and economic issues, increasing healthcare costs, slow job growth, increased taxes and gasoline prices. According to a poll conducted by Reuters, about 27% of the consumers were planning to lower their spending on apparel this holiday season. ^[2] Moreover, the holiday season this year is shorter than the last year. Since there are only 25 days between Black Friday and Christmas as opposed to 31 days in 2012, it provides a smaller window to gain from holiday spending. So far, the holiday retail sales trends have been inline with ShopperTrak’s prediction. U.S. retail sales on Thanksgiving and Black Friday (two of the most important holidays) increased by just 2.3%. ^[3]

However, Urban Outfitters’ Brand Strength Positions It Well

Urban Outfitters – 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. During the three quarters before Q3 fiscal 2014, the brand’s comparable store sales grew by 5%,6% and 11% respectively. However, its comparable sales declined by 1% during Q3 due to some missed fashion calls and off pitch marketing. Although the company is planning conservatively for the holiday season, we still believe that this brand can perform better than its competitors.

Anthropologie – 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% growth 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. ^[4]

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. ^[4]

E-Commerce Growth Will Fuel The Company’s Holiday Sales

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 the growing popularity of online shopping and Urban Outfitters’ strong brand recognition. During Q3 fiscal 2014, the company witnessed 7% rise in web traffic, a 34 basis points improvement in conversion rate and an increase in average order value. We believe that this growth will continue in the holiday season backed by the retailer’s efforts.

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 the 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. Urban Outfitters will be encouraged by the fact that during last year’s holiday quarter, which wasn’t the best in the U.S. history, its direct business registered record growth of 44%.

Mobile Investments To Tap The M-Commerce Opportunity

For the upcoming holiday season, eMarketer forecasts growth of 15% in online retail sales in the U.S. While this growth rate matches last year’s gains, mobile channel’s share in online sales is expected to be more than what it was last year. According to eMarketer’s projections, mobile’s share will reach 16% in 2013 up from 15% in 2012. ^[5] This implies that mobile is likely to be a lucrative channel for U.S. retailers this holiday season. Hence, it makes sense  for Urban Outfitters to revamp its mobile channel.

Recently, the retailer overhauled its mobile apps, added a number of new features and introduced generation 5 iphone app Urban On. 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. ^[4] Also, Urban Outfitters is providing its customers with a 2D barcode scanner and a dedicated radio station. ^[6]

Understand How a Company’s Products Impact its Stock Price at Trefis

1. ShopperTrak Expects Holiday Sales Will Increase in 2013, ShopperTrak, Sept 17 2013 [↩]
2. U.S. holiday sales expected to rise less than last year: ShopperTrak, Reuters, Sept 17 2013 [↩]
3. U.S. Retail Holiday Sales Up 2.3%, Foot Traffic Declines, Bloomberg, Dec 1 2013 [↩]
4. Urban Outfitters’ Q3 fiscal 2014 earnings transcript, Nov 19 2013 [↩] [↩] [↩]
5. Mobile Devices To Boost US Holiday Ecommerce Sales Growth, eMarketer, Sept 5 2013 [↩]
6. Urban Outfitters Preps For Holidays With Mobile Investments, Adage, Oct 9 2013 [↩]