What’s Going Wrong At Urban Outfitters?

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URBN: Urban Outfitters logo
URBN
Urban Outfitters

Shares in Urban Outfitters (NASDAQ:URBN) fell sharply early on June 8th once the company warned of an uptick in the comparable sales decline in the second quarter (three months ended July 2017), carrying on the downward trajectory of the stock price since the beginning of the year. In its first quarter earnings filing with the SEC, the company noted that “thus far during the second quarter of fiscal 2018, comparable Retail segment net sales are high single-digit negative.” Comparable store sales refers to sales in a company’s stores that have been open for at least a year, compared to the same period in the year prior. This is an important metric in the retail industry as it excludes the boost the company may have received from newly opened stores. In the case of Urban, this metric also includes sales garnered through the direct-to-consumer (DTC) channel. If the high single digit decline continues in the remainder of the quarter, it would represent a rise from the 3.1% fall reported in the most recent quarter. Meanwhile, analysts were expecting the sales to slump by 2.5%. Below we’ll highlight certain other factors that have resulted in pessimism regarding the company’s stock.

URBN Stock Price

Poor Holiday Period And First Quarter Earnings

Urban Outfitters’ stock price trended upwards for most of 2016, driven by improving comparable sales and operating margin. However, the company’s third quarter results (ended October 2016), declared on November 22, missed out on consensus estimates for revenue and EPS, sending its stock price on a downward trend. After a brief spurt in the beginning of December, the share price has continued to tumble. This was further hampered by the release of a weak Holiday sales report on January 9. While the revenue of $1.03 billion in the holiday quarter came in higher than last year’s $1.01 billion, it missed analysts’ forecasts of $1.05 billion. The same-store sales for the company were flat, with Urban Outfitters up 2%, Free People reporting 1.2% growth, and Anthropologie Group falling by 2.9%. However, consensus estimates had called for a comps growth of 1.4%.

URBN Q4 2017 Earnings

Moreover, the company posted dismal results in the first quarter of FY 2018. URBN reported its earnings on May 16, delivering a bad miss on EPS. Heavy discounting at Anthropologie and its eponymous Urban Outfitters brand, as well as a greater focus on the direct to consumer (DTC) segment pressured the margins, resulting in a 60% fall in the earnings per share over the corresponding quarter last year. Relatively flat revenues were also noted, despite double-digit growth in e-commerce revenues.

URBN Q1 2018 Earnings

Brick-And-Mortar Woes

Tough times for the American retail industry were underscored in the company’s disappointing earnings, wherein problems in the brick-and-mortar stores overshadowed the impressive growth in the DTC and wholesale channel. In the face of the realization that millennials don’t want to go to malls, many mall-based retailers have announced several rounds of store closures in recent times. Retail analyst Jan Rogers Kniffen told CNBC in May of last year that he predicts 400 of the 1,100 enclosed malls in the US will close in the coming years, and only 250 of the remaining ones will thrive. The US has 23.5 square feet of retail space per capita, in comparison to 16.4 square feet in Canada and 11.1 square feet in Australia — the next two countries with the highest retail space per capita, according to a Morningstar report from October. Given this statistic, he further noted that the footprint is poised to decline “pretty fast.”

With growing internet penetration, a consistent customer shift from store to web shopping, and the proliferation of smartphones and tablets, the growth in online shopping has been massive. Online retail sales in the U.S. have grown at a rapid pace over the past several years, thanks to growing internet usage in the country. Internet penetration in the U.S. has gone up from 44% in 2000 to 88.5% currently. Furthermore, facilitated by the convenience of constant access, 92% of teens today go online daily, including 24% who are online constantly, according to a study conducted by Pew Research Center. The smartphone usage will only increase in the future, and this will likely result in a steady rise in online sales. This is evidenced by research which predicts online apparel sales in the US to increase its revenue from $63 billion in 2015 to $100 billion by 2019. This segment is considered as the most popular e-commerce category in the US, accounting for 17.2% of total e-retail sales in 2015. The U.S. apparel industry is gradually shifting towards omni-channel retailing, which refers to providing a seamless shopping experience across stores and the online channel.

Even in the case of Urban Outfitters, essentially all of their growth has come from internet sales. This trend is indicative of the retail industry as a whole, that such companies haven’t figured out a way to increase their store sales at the same time as their online revenues. The progress of Urban Outfitters in its digital channel was evidenced by double-digit direct sales gains, and the DTC penetration increased to north of 35% for Urban Outfitters and Anthropologie, and over 50% for Free People. Given the strong showing, this segment remains Urban’s biggest opportunity and primary focus, and the company intends to add followers and expand its social media presence, as well as build its content and add more products, categories, and brands. The company expects its digital sales to double within the next five years.

See our complete analysis for Urban Outfitters

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Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such 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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