Slowdown In Mall Traffic To Negatively Impact Urban Outfitters’ Results

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Urban Outfitters

Urban Outfitters’ (NASDAQ:URBN) second quarter is expected to be a tough one, and a decline in revenues and a sharp fall in its earnings is expected when the company releases its earnings on August 15. 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%.

Brick-And-Mortar Woes

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Tough times for the American retail industry were underscored in the company’s disappointing first quarter 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 will thrive. He further noted that the since the US has an estimated 48 square feet of retail space per citizen, the footprint is poised to decline “pretty fast.”

With growing internet penetration and the proliferation of smartphones, there has been a consistent shift from in-store shopping towards the online channel. The smartphone usage is only going to grow in the future, seemingly sounding the death knell for the traditional apparel retail industry. Furthermore, with the rise of fast-fashion retailers such as H&M, Zara, and Uniqlo, who are able to move styles from the runway to the stores within weeks, constantly evolving their assortment and keeping their products fresh, another threat looms over this industry. Such a state of affairs has battered the apparel retail sector, which has been hit hard with a spate of bankruptcies and store closures. True Religion became the latest casualty, as it filed for bankruptcy, and intends to close at least 27 of their 140 stores in the US. More than 300 retailers have filed for bankruptcy this year, according to date from BanruptcyData.com, a rise of 31% from last year. While most of these are small stores, there are some big names in the list, including Gymboree, Payless ShoeSource, Rue21, RadioShack, Wet Seal, and The Limited. In such a situation, Urban’s declining sales and earnings cannot come as much of a shock.

Store Growth To Come From International Regions

International sales currently account for less than 10% of the company’s revenue. Given the strong performance of the brand in Europe, URBN believes it has substantial room to grow and increase its international sales penetration. In this regard, the company has identified and negotiated half a dozen store locations for Europe, as well as franchise arrangements for Middle Eastern and other countries. URBN intends to open three new stores in Europe this year, and ramp up its pace in the next several years. The company will also focus its international expansion in the digital and wholesale realm as well.

The company believes its store count for Urban Outfitters and Anthropologie to be at a satisfactory number, while that of Free People, currently at 130 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. Hence, all the store count growth in the future will come from international locations, where the company is under-penetrated currently. In Europe, Urban has less than 100 stores across all its brands currently.

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