Urban Outfitters Earnings: Mainline Brand Remains A Concern While Free People And Anthropologie Continue To Grow

The uncertainty in the teen apparel industry, which troubled most apparel retailers throughout last year, has started creating problems for Urban Outfitters (NASDAQ:URBN) as well. The company released its earnings May 19th.  Following a 9% comparable sales decline in Q4 fiscal 2014, the retailer’s mainline brand registered 12% fall in this metric in the first quarter of fiscal 2015. However, strong growth of other brands (Anthropologie and Free People) that focus on older and more affluent demographic, was able to offset this impact and bring the company’s results closer to the consensus estimate. Due to the slump in its namesake brand, Urban Outfitters’ Q1 fiscal 2015 comparable sales remained flat, despite a 25% jump at Free People and 8% rise at Anthropologie. Overall, the retailer’s sales increased by 6% to $686 million, which was slightly below the market estimate of $688 million. ^[1]

While Urban Outfitters’ results look passable on the outside, the consistently performance of its namesake brand is alarming. For the past three quarters, Urban Outfitters has struggled to attract customers due to certain missed fashion calls, off pitch marketing, poor product execution and fierce competition from fast-fashion brands such as Forever 21 and H&M. However, the company believes that the brand will be back on track in the near future through assiduous revival efforts. Meanwhile, Anthropologie and Free People continue to grow at a hefty pace driven by their enticing merchandise offerings. This is likely to boost Urban Outfitters’ results in the future while its mainline brand recovers.

Our price estimate for Urban Outfitters at $43.43, implies a premium of about 20% to the current market price. However, we are in the process of updating our model in light of the recent earnings release.

See our complete analysis for Urban Outfitters

Urban Outfitters’ Recovery Will Be A Priority

Urban Outfitters’ namesake brand lost its momentum towards the latter half of fiscal 2014 as it was unable to deliver its iconic preppy merchandise in an energetic environment. The brand mainly offers a distinctive shopping experience, creativity and eclectic fashion products, and Urban Outfitters feels that it did not leverage these factors as strongly as it did in the previous year. In addition, miscalculation of demand and aggressive marketing of products with low demand worked against the retailer. However, Urban Outfitters has taken several valuable steps over the past few months to rejuvenate its brand image and offer better merchandise.

Last month, the company hired Trish Donnelly as the president of its namesake brand in North America. Ms. Donnelly has vast experience in merchandising and direct-to-consumer business. She had previously worked for three years as president at Steven Alan and for seven years as executive vice president at 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 engaging environment. The concept, initially launched in five stores, was expanded to eight stores by the end of the first quarter, where it received good response. The retailer plans to add this concept to more stores in the current year with enhanced product offerings. Additionally, Urban Outfitters is focused on promoting its compelling merchandise through creative display and online imagery. It is planning to include living and home, beauty, music and food offerings in its product portfolio. Alongside, the retailer is looking to enhance the brand’s reach with expansion of new format stores, which offer a differentiated experience of lifestyle mix of merchandise, food, drinks, events and services. ^[2]

Anthropologie Will Continue To Boost Results

With its renewed theme and improved product mix, Anthropologie brand has grown at a tremendous pace over the past several quarters. The brand witnessed 10% growth in comparable sales in Q4 fiscal 2014 and followed it up with another remarkable quarter. We believe that Anthropologie will be able to sustain this momentum going forward backed by its resolute efforts to remain inline with customer taste. The brand is focused on consistently improving its merchandise design and providing its customers with a world-class in-store experience by leveraging engaging story telling techniques. Its Anthro membership program (where participation increased by 15% in Q1 as compared to the same quarter last year) is turning out to be a valuable traffic driver.

Going forward, Urban Outfitters is planning to ramp its investments in Anthropologie’s product and distribution expansion along with strategic expansion of home and accessories assortments. By the year end, the retailer will begin test changes in categories such as home, jewelry, shoes and bags. The company has also started testing petites and BHLDN shop-in-shop concepts in Anthropologie stores and websites. Driven by its success, Urban Outfitters plans to introduce a BHLDN URL on high traffic Anthropologie websites along with more shop-in-shop locations in its stores.

See More at Trefis | View Interactive Institutional Research (Powered by Trefis)

1. Urban Outfitters Reports Record Q1 Sales, Urban Outfitters, May 19 2014 [↩]
2. Urban Outfitters Q1 fiscal 2015 earnings transcript, May 19 2014 [↩]