Urban Outfitters Earnings Preview: Strong Anthropologie And Online Growth To Drive Results

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URBN: Urban Outfitters logo
URBN
Urban Outfitters

Urban Outfitters (NASDAQ:URBN) is one of the few U.S. apparel retailers who have performed very well amid an uncertain economic environment. The brand is very popular among American youth due to its affordable eclectic and preppy products. Despite exhibiting low brand loyalty towards top apparel brands, U.S. buyers have shopped regularly at Urban Outfitters, propelling its growth.

However, over the past few quarters, the retailer’s namesake brand has struggled due to certain missed fashion calls, off pitched marketing, poor product execution and fierce competition from fast fashion brands such as H&M and Forever 21. Though the company believes that the brand will bounce back in the near term backed by its rigorous efforts, we might not see a turnaround in the upcoming Q2 fiscal 2015 results on August 18. Nevertheless, Anthropologie and Free People are strong enough to offset the impact of Urban Outfitters’ slipping sales.

Moreover, gradual shift in shopping preference from stores to online channel will help Urban Outfitters’ result. The company was among the first few apparel retailers in the U.S. to adopt omni-channel retailing in the wake of growing consumer interest in online shopping. Urban Outfitters has effectively integrated its stores, web and mobile channel to give its customers a seamless shopping experience. It has sustained a tremendous growth rate in its e-commerce revenues that has also boosted its same-store sales. We believe that this trend will continue in the second quarter of fiscal 2015.

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Our price estimate for Urban Outfitters at $40.68, implies a premium of about 10% to the current market price.

See our complete analysis for Urban Outfitters

Strong Growth in Anthropologie will Offset Urban Outfitters’ Falling Sales

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 effective manner. The brand’s unique selling proposition is its 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. As a result, Urban Outfitters’ comparable sales declined by 9% in Q4 fiscal 2014 and 12% in Q1 fiscal 2015. Although the company has promptly responded to this situation by hiring a new brand president, introducing new concepts, and adding new categories such as food, beauty, music etc., a turnaround within a quarter seems unlikely. However, we may see some measurable results by the year end.

On the other hand, Anthropologie and Free People have emerged as the strongest aspects of Urban Outfitters’ business. Anthropologie in particular has grown at a tremendous pace over the past several quarters, backed by its renewed theme and improved product mix. 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 in the second quarter of fiscal 2015 with its resolute efforts to remain in line 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, participation for which increased by 15% in Q1 as compared to the same quarter last year, is turning out to be a valuable traffic driver.

Shifting Shopping Preference to Help Results

Due to growing usage of the Internet and increased proliferation of smartphones and tablets, online shopping has become very popular in the U.S. Buyers are gradually shifting from stores to websites, which is negatively impacting industry-wide foot traffic. While this isn’t a favorable trend for retailers who do not have a sizable web presence, certain apparel companies including Urban Outfitters have thrived on trend. Over the last two years, while store traffic has declined 5% year over year in every month, except April 2014, online sales have grown 15% year over year in every quarter. [1]

Urban Outfitters’ direct-to-consumer growth usually stays ahead of the industry growth rate because it is one of the strongest brands in the market. Since the adoption of omni-channel retailing, this has had a notable impact on the company’s comparable sales growth. During the last three months, store traffic across the industry declined by roughly 5%, but overall retail sales grew steadily. This indicates that online retail sales in the U.S. increased considerably in the past quarter. Hence, we have sufficient reasons to believe that Urban Outfitters realized strong growth in its direct-to-consumer revenues in Q2, which will be reflected in its same-store sales growth.

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Notes:
  1. Shoppers Are Fleeing Physical Stores, The Wall Street Journal, Aug 5 2014 []