Online Sales To Boost Revenue For Urban Outfitters

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URBN: Urban Outfitters logo
URBN
Urban Outfitters

Urban Outfitters (NASDAQ:URBN) will release its first quarter earnings on May 16, 2017, wherein a slight growth in revenue and a significant drop in earnings per share is expected. However, the decline in earnings may not be so bad, as indicated by the upward revisions to the EPS in recent weeks by a number of analysts, generally a precursor to an earnings beat. Increased penetration of the direct-to-consumer (DTC) channel, as well as higher promotional activities are expected, which would result in a decline in margins, and consequently a fall in the earnings. Meanwhile, strong growth in the DTC segment is expected to offset weak retail store sales, inducing the rise in revenue.

URBN Q1 2018 Pre Earnings

Focus On Omni-Channel Retail

A focus on the DTC channel stems from the rise in omni-channel retailing, which seems to be one of the few growth areas for retail. In 2016, the internet contributed to 42% of the growth in the US retail market, representing 11.7% of the total sales. The company also believes that its store count in the US for both Urban Outfitters, currently at 199 stores, and Anthropologie, at 210 stores, is the right figure for the US. According to the CEO Richard Hayne, the US is overstocked in the apparel category, with approximately six times more retail square feet per capita than in Europe or Japan, and hence, the company is not undertaking any store expansion. Essentially all of the company’s growth in the past has come from internet sales, a trend indicative of the retail industry as a whole.

Retail companies have reported disappointing first quarter earnings, with Macy’s, Kohl’s, and Nordstrom all failing to excite investors. Online sales have grown at a rapid pace in recent years, eating away at the revenue from brick-and-mortar stores. Few retailers seem to be safe in the face of this trend. However, Urban Outfitters seems to be in a good position to prosper, as it has made the right moves to prepare for this shift. Internet sales currently account for approximately 37% of their revenue, much higher than the corresponding figures for other retailers. As a result of this strong position, the company would not have to resort to store closures in order to be profitable.

While concentrating on the online channel makes sense, an inherent problem associated with this strategy is the increased pressure on margins. Undertaking investment to develop e-commerce capabilities, as well as for improving the online experience, just means higher costs. Furthermore, in order to compete with companies, such as Amazon, retailers will also need to cut down the prices of products sold online. This results in a higher promotional environment, which does not do the margins any favor. With a rise in the contribution of online sales to the total revenue, the profit and margins will continue to be negatively affected.

International Expansion

While the company seems to be still in the expansion phase in terms of brick and mortar stores, it is mostly concentrated in the international markets. The company intends on opening 18 new stores during FY 2018 (ended January 2018), while closing 7 stores due to lease expiration. Urban Outfitters brand will open one new store in North America, while closing two, and three new stores in Europe. The company believes its store count for Urban Outfitters and Anthropologie to be at a satisfactory number, while that of Free People, currently at 127 stores, to be nearing the North American desired total. As the existing leases come up for renewal in the US, the company will review each location, and continue to close existing stores that do not meet its criteria.

URBN will continue to expand its Urban Outfitters and Anthropologie brands in Europe, and have begun to look for the first location for its Free People brand in the region. The company has also reported it was exploring partnerships in the Middle East and working through its Asian growth strategy for each of its brands.

URBN Store Openings FY 2018

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Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Urban Outfitters
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