Does Urban Outfitters’ Strategy Of Opening New Stores Make Sense?

Foot traffic at malls has declined considerably in recent times, owing to a weak economy and the rise of omnichannel retailing, which is expected to grow to $1.8 trillion in the US by 2017, according to research firm Forrester. Urban Outfitters (NASDAQ:URBN) has been a first mover in this space, and now derives about a quarter of its sales through e-commerce. More significantly, it believes it has figured out what the shoppers want, and is making efforts to transform its stores to please its customers. The company is trying to create an unmatched in-store experience which would help them to capture a greater share, by expanding its store format and providing a broader offering in categories such as home, beauty, and intimates, besides its BHLDN wedding brand, and the Terrain outdoor living brand.

See our complete analysis for Urban Outfitters

While several retailers have been undertaking store closures, Urban Outfitters still seems to be in an expansion phase. According to its  CEO, Richard Hayne, the US is overstocked in the apparel category, with approximately ten times more retail space per capita than in Europe. A factor working in URBN’s favor is that it does not have a sprawling store footprint; instead, it undertook a cautious approach, which is serving them well now.

However, in recent quarters, the company’s comparable sales growth has been driven by its direct-to-consumer (DTC) channel, partially offset by negative comparable store net sales. This means that the ecommerce segment of the company has been mainly responsible for the sales growth, with the physical stores actually losing ground. In the most recent quarter (ended October 2016), the company again reported an increase in Retail segment comps, driven by continued growth in the DTC channel, as a result of an increase in sessions and conversion rate, while negative comparable store net sales resulted from a decrease in average unit selling price and transactions. This implies that fewer customers are coming to the stores, and are buying less when they do.

Urban Outfitters isn’t alone in this situation. For many other companies, the sales growth is coming entirely from its ecommerce channel. But unlike other brick and mortar retailers that have stopped opening new stores, Urban has stated its intentions to continue building more. Furthermore, it’s not just new stores; the company is opening bigger stores to accommodate its expanding assortment in its Anthropologie division. During the first quarter, the company opened its first two expanded footprint locations for its Anthropologie brand, in Portland, followed by one in Newport. These are expansions of existing stores, with two and a half times more square footage than the typical store, designed to deliver an engaging experience to new and current customers. This larger area gives them the ability to offer a broader assortment in the expanded categories, including a petite shop, jewelry and accessories, an intimate boutique, an 800 square foot beauty shop, shoe salon, and over 6,000 square feet of home. This was met with a favorable customer response, with higher average order value and units per transaction. On the basis of this, the company decided to open four more stores in this format in the next 12 months, with sizes ranging from 20 to over 30,000 square feet, which would include Terrain, BHLDN, and a dining experience. However, this gives a picture of a department store, the same channel that has been struggling in recent times to attract shoppers. While the company remains hopeful of this strategy, it remains to be seen whether it will work out in the future. Given the struggles that the Anthropologie brand has been facing in the recent quarters, however, a change in strategy seems to be a positive approach.

Have more questions about Urban Outfitters? See the links below:

• Urban Outfitters’ Sales Growth Set To Continue
• How Will Urban Outfitters Perform In 2016?
• Why Is Urban Outfitters Investing In Restaurants?
• Why Has Urban Outfitters’ Stock Price Risen 66% In 2016?
• Higher Comparable Sales Helps Urban Outfitters Beat Consensus Estimates
• How Will Urban Outfitters Perform In The Second Quarter Of Its FY 2017?
• How Has Urban Outfitters Revenue Composition Changed Over The Last Three Years?
• What Are The Changes Urban Outfitters Is Implementing To Differentiate Itself?
• Why Is Urban Outfitters Increasing Its Store Count While Its Peers Are Cutting Down?
• Earnings Review: Why Were Urban Outfitters’ Results Impressive?
• What Is Urban Outfitters’ Revenue & Net Income Breakdown In Terms of Different Operating Segments?
• How Has Urban Outfitters’ Revenue Composition Changed In The Last Five Years?
• What Is Urban Outfitters’ Fundamental Value Based On Expected 2016 Results?

Notes:

Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap |More Trefis Research