While Urban Outfitters (NASDAQ:URBN) has exhibited tremendous resilience against the edgy retail environment with its preppy products, its namesake brand hasn’t performed very well. Urban Outfitters registered substantial decline in its comparable sales during the last two quarters of fiscal 2014 on account of missed fashion calls and low creativity. In response to its slipping sales, the retailer is taking several steps to ensure its mainline brand’s speedy recovery. The company recently appointed Trish Donnelly to the role of president of Urban Outfitters North America.  With her expertise in merchandising and direct-to-consumer business, she is likely to play an influential role in the brand’s growth. In addition, the retailer is looking to improve Urban Outfitters’ procedures, communications and functions, that can help its revival. Although it is unlikely that Urban Outfitters will see a complete turnaround in the near future, it should improve over time as the company is prioritizing the brand’s recovery in fiscal 2015.
Our price estimate for Urban Outfitters stands at $43, implying a premium of about 20% to the market price.
Urban Outfitters Lost Its Momentum Towards The Latter Half Of Fiscal 2014
Urban Outfitters’ namesake brand comparable store sales declined by 1% in Q3 fiscal 2014 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, and 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. The brand’s problems continued in the fourth quarter as its comparable sales declined by 9% mainly due to weak response to its fashion and partially on account of adverse weather conditions (450 basis points contribution). The management stated that poor product execution and lack of creativity resulted in the brand’s dismal performance.
New Leadership Can Complement Turnaround Efforts
A couple of weeks back, Urban Outfitters hired Trish Donnelly as the president of its namesake brand in North America. Ms. Donnelly has a deep understanding of the direct-to-consumer sector and vast experience in merchandising. She had previously worked for three years as president at Steven Alan and for seven years as executive vice president of J. Crew Direct. The company believes that she can leverage her business expertise and strong leadership qualities to devise some relevant strategies for Urban Outfitters’ growth.
Additionally, Urban Outfitters is elevating its creative functions and restructuring new procedures and communication, into a more central role in order to reconnect with its core customers. During the fourth quarter of fiscal 2014, Urban Outfitters introduced a new concept named “Without Walls”, which aims to attract young customers with active lifestyle products, placed in an enthralling environment. The concept was recently launched in five stores, where it received tremendous customer response. The retailer is now planning to open three to six such store-in-store locations in fiscal 2015.
The company also made significant strides towards the improvement of its supply chain system during the last year, which should assist Urban Outfitters’ revival. The retailer lowered its weeks of supply by one week and reduced its lead times by more than 10%, which should help it better adjust to the changing customer preferences. It also reduced direct-to-consumer orders fulfillment time by 30% and shipping time by over 15%, to improve customer service. We believe that these efforts along with an improvement in design should help the brand’s steady recovery going forward. Notes:
- Urban Outfitters Announces Appointment of Trish Donnelly, President of Urban Outfitters Brand, North America, Urban Outfitters, Apr 17 2014 [↩]
- Urban Outfitters’ Q4 fiscal 2014 earnings transcript, Mar 10 2014 [↩]