Urban Outfitters’ Earnings Preview: Improved Consumer Spending, Strong Anthropologie & Free People Brands Will Drive Growth

Urban Outfitters (NASDAQ:URBN) is one of the few apparel retailers in the U.S., who performed very well last year despite the edgy retail environment. With its strong brands and a preppy product range, the retailer was able to drive sufficient store traffic even when U.S. buyers had scaled back their spending on apparel. However, consumer spending has improved notably this year driven by improved consumer confidence and better employment scenario. This is likely to bolster Urban Outfitters’ Q1 fiscal 2015 results, scheduled to be released on May 19. The retailer’s Anthropologie brand has improved substantially since its product imbalance issues and we see no reason for it to lose its momentum in the first quarter.  The Free People brand registered significant growth in revenues and comparable sales last year, which is likely to continue in this quarter as well. However, Urban Outfitters’ namesake brand might remain a drag on its growth as the retailer’s turnaround efforts are unlikely to have yielded desired results in the first quarter.

Our price estimate for Urban Outfitters at $43.43, implies a premium of more than 15% to the current market price.

See our complete analysis for Urban Outfitters

Improved Consumer Spending Can Help Urban Outfitters’ Results

Urban Outfitters was able to perform well even when the macroeconomic environment wasn’t conducive for the retail market growth. The retailer’s revenues jumped 6% in the fourth quarter of fiscal 2014, which included an industry wide bleak holiday season. Since conditions have started to improve now, Urban Outfitters’ might report better results. After being weighed down by harsh weather and sluggish consumer spending, retail sales in the U.S. rebounded in the first quarter (February-April) of 2014 with renewed consumer confidence and better employment data.

Consumer confidence index in the U.S. reached 100 in the first quarter, propelled by better employment data, and rising equity and home prices. ^[1] Applications for unemployment benefits dropped to their lowest level in more than three months in early March. Labor Department reported a fall of 9,000 in initial claims for unemployment benefits in the first week of March. Average job growth in February and March (195,000) was much better than what it was in the prior two months. In fact, for the first time, jobless benefits applications in early April were at their pre-rescession levels. ^[2]

Retail sales in February improved marginally by 0.7%, followed by 1.1% jump in March, which was their biggest gain in over 18 months. Once the weather became suitable for store shopping, U.S. buyers were less reluctant to spend on furniture, clothing, general merchandise, health and personal care, food and beverage, sporting goods etc. Although market growth slowed down in April to 0.1%, overall growth in the first quarter still looks pleasing. ^[3]

Anthropologie Will Continue To Drive Growth

Anthropologie has improved its product mix and designs substantially over the last few quarters, and its updated theme of sensual and feminine looks has found tremendous acceptance among its customers. To attract customers and enhance its appeal, the brand creates engaging story telling techniques through its store windows, visual merchandising and display, along with catalog and email communications. As a result of these, Anthropologie witnessed double-digit growth in its regular price comparable sales in Q4 fiscal 2014 with an overall comparable sales growth of 10%. We expect this trend to continue in Q1 fiscal 2015 as well.

Apart from its core products, Anthropologie’s new launches have also done very well. During Q4, the brand expanded its boutique assortments to seven Anthropologie stores. Boutique assortment sales increased by 303% in the fourth quarter and the company plans to expand this category to twelve additional stores in fiscal 2015. This move adds a new category to Anthropologie’s portfolio, which can contribute to its growth in the first quarter.

Free People Will Sustain Its Momentum

Urban Outfitters’ Free People brand has grown at a robust pace over the past few years, which continued in fiscal 2014 as well. The brand’s revenues in fiscal 2014 increased by almost 30% and its comparable sales during the fourth quarter surged by 20%. Moreover, Free People’s international and domestic shop-in-shop expansion resulted in 24% rise in wholesale revenues. Alongside, the brand continued the expansion of its intimate category, where retail sales grew twice as fast as apparel sales. Free People’s footwear category also registered a strong rise of 54% in retail revenues, suggesting that buyers have developed a liking for the brand. Overall, Free People turned out to be the most productive brand for Urban Outfitters in fiscal 2014 and is likely to sustain its healthy growth momentum in the first quarter of fiscal 2015.

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1. U.S. consumer confidence rebounds to pre-crises levels in first quarter: Nielsen, Reuters, Apr 29 2014 [↩]
2. Bullish U.S. retail sales brighten growth outlook, Reuters, Apr 14 2014 [↩]
3. Retail sales slow, but growth outlook still upbeat, Reuters, May 13 2014 [↩]