Urban Outfitters’ Earnings Preview: Strong Holiday Growth Will Help Q4 Results

Teen apparel retailer Urban Outfitters (NASDAQ:URBN) is expected to release its Q4 fiscal 2014 results in the near future. Unlike other apparel retailers in the U.S., who have struggled due to weak consumer confidence and low brand loyalty, Urban Outfitters is likely to register healthy growth. Last month, the retailer reported an 8% rise in holiday sales (November and December), on top of 15% growth witnessed in the same period last year. ^[1] Its strong brand recognition and sturdy direct-to-consumer channel helped it attract store and web traffic amid retail weakness. We expect the company to have carried this growth momentum in January as well, even though the retail market was reeling under the impact from extreme cold and weak consumer sentiment. ^[2]

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.

Q4 (November – January) Wasn’t The Best One For U.S. Retailers

Due to the impact of increased taxes, slow job growth, changing spending patterns, higher healthcare costs and gasoline prices, U.S. buyers spent cautiously last year. This was clearly visible in the holiday season as the U.S. retail industry saw its weakest growth since 2009. Moreover, extreme weather conditions prevented buyers from completing their shopping. As a result, U.S. foot traffic declined by 17.7% in December 2013 as compared to the same month last year. ^[3] Overall, foot traffic during the holiday season decreased by a staggering 14.6%, which was significantly higher than ShopperTrak’s earlier prediction of 1.4% decline. ^{[4] [5]} Moreover, while U.S. buyers spent freely on electronics, furniture and building materials, they were hesitant to spend on clothing. According to a Reuters poll conducted before the holiday season, about 27% of consumers were planning to lower their spending on apparel this holiday season. ^[6]

In January, the retail growth failed to pick up as consumer confidence slipped and the U.S. witnessed record cold and heavy snowfall, that prevented store visits. The Thompson Reuters/University of Michigan’s consumer sentiment index fell to 81.2 in January from 82.5 in the previous month. ^[2] As a result, there was intense competition in the apparel industry to capture a sizable share of the low U.S. consumer spending during the fourth quarter.

However, Urban Outfitters’ Brand Strength Will Help It Fend Off Industry Weakness

Despite the tough environment for apparel retailers, Urban Outfitters recorded strong growth during the holiday season as its products resonate very well with customers. Although its namesake brand fumbled, due to missed fashion calls, growth of Anthropologie and Free People subdued the impact of Urban Outfitters‘ revenue decline. The retailer’s revenues increased by almost 8% along with a 3% rise in comparable store sales. The comparable retail segment net sales increased 21% at Free People and 11% at Anthropologie, while decreasing 6% at Urban Outfitters. In the wholesale segment, Urban Outfitters’ revenues increased by 21%. Overall, the company generated $716 million in revenues during the holiday season, which is its best performance so far. ^[1]

U.S. buyers have shown low brand loyalty as they have been readily shifting to brands that provide relevant and latest fashion at affordable prices. Urban Outfitters has connected very well with its customers on this front thanks to its popular brands. Customers have responded positively to Anthropologie’s new theme of sensual and feminine looks, which has led to an increase in full priced sales. Moreover, with its strong and diverse supply chain of over 4,100 vendors globally, Urban Outfitters has responded to its customers’ needs in an effective way. New collections have hit stores on time, which has enabled the company to drive greater store traffic without offering heavy discounts. Considering the aforementioned factors, we believe that the retailer’s steady growth continued in January as well.

Strong E-Commerce Channel Will Benefit From Rise In Online Orders

Urban Outfitters’ big direct-to-consumer channel played a crucial role in its strong revenue growth during the holiday season. In December, as bad weather conditions kept U.S. buyers away from the stores, they stayed home and bought more online. As a result, there was a heavy surge in online orders. This is evident from the fact that United Parcel Service (NYSE:UPS), which is one of the biggest player in e-commerce delivery, struggled to ship orders on time. ^[7] Abercrombie & Fitch (NYSE:ANF), which usually earns close to 15% of its revenues from e-commerce business, saw this figure escalate to 25%. Since U.S. shoppers stayed away from stores during the month of January due to extreme weather conditions, it is likely that some, at least, preferred to shop online. This could have helped the channel’s growth in January as well.

Since Urban Outfitters’ e-commerce channel makes up about one-fourth of its net revenues, it will have a noticeable impact on the company’s results. Apart from the aforementioned trends, the retailer’s investments in this channel are likely to complement its growth. Since October last year, Urban Outfitters has resigned its namesake brand website, launched Anthropologie’s refreshed website, overhauled its mobile apps, added a number of new features, and introduced generation 5 iPhone app Urban On. ^[8]

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

1. Urban Outfitters Reports Record Holiday Sales, Urban Outfitters, Jan 9 2014 [↩] [↩]
2. U.S. retailers’ sales chilled by weather, and low consumer confidence, Reuters, Feb 6 2014 [↩] [↩]
3. Retailing Today: December 2013, ShopperTrak, Jan 8 2014 [↩]
4. Retailers See Fourth Consecutive Quarter Annual Sales Increase During 2013 Holiday Season, ShopperTrak, Jan 8 2013 [↩]
5. ShopperTrak Expects Holiday Sales Will Increase In 2013, ShopperTrak, Sept 17 2013 [↩]
6. U.S. holiday sales expected to rise less than last year: ShopperTrak, Reuters, Sept 17 2013 [↩]
7. Behind UPS’s Christmas Eve Snafu, The Wall Street Journal, Dec 26 2013 [↩]
8. Urban Outfitters Preps For Holidays With Mobile Investments, Adage, Oct 9 2013 [↩]