Benefit Of Higher Consumer Spending Continuing In Q2 For Urban Outfitters

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Trefis
URBN: Urban Outfitters logo
URBN
Urban Outfitters

Urban Outfitters (NASDAQ:URBN) was among the top performing companies in the retail sector in the first quarter. Comparable sales growth for the company came in at 10%, higher than the 8.9% forecast by analysts, led by a 15% improvement at Free People, followed by 10% at Anthropologie, and 8% at its namesake brand. Moreover, it was the first quarter in four years that the company was able to post positive store comps at each of its brands. This growth was spurred on by higher consumer spending, despite a longer than normal winter, as well as easier comparisons versus the same period last year. These factors have continued to aid the retailer, with the company reporting that in the second quarter-to-date, the comparable sales growth in the retail segment has been mid-teens positive.

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Factors That Should Positively Impact Urban Outfitters Going Forward

1. Strength of Digital Segment: The shift toward the online space has been pretty evident, with the digital penetration of URBN’s retail segment sales exceeding 40% for the first time in Q4 2018 (quarter ended January 2018). This strength continued in the first quarter as well. Free People and Anthropologie have benefited the most with this shift, and their digital penetration has increased to over 50%. To take advantage of the popularity of the online channel, URBN re-platformed its website, enabling better functionality for customers, including in-store pick-up capabilities, improved delivery options, a more responsive site, faster load times, and the addition of Apple Pay and Afterpay as alternative payment methods. While its successful implementation resulted in a strong double-digit increase in digital sales for the brand in the first quarter, its benefit can be expected to continue in the future.

2. Good Momentum In The Home Business: The Home products provided by Anthropologie delivered its 15th sequential quarter of positive comps, driven by an increased and innovative assortment, high double-digit growth in digital sales, and the mini-home showroom concept within certain Anthropologie stores, which is expected to be rolled out in more stores this financial year. The momentum in this business continues to be strong, and should drive the brand’s sales in the coming quarters.

3. Addition Of Anthropologie In Wholesale: Anthropologie home wholesale was launched in North America in March, in partnership with Nordstrom. This follows the success of Anthropologie wholesale in the U.K. last financial year. While it is currently available in 15 Nordstrom stores and online, this assortment is anticipated to be included in additional stores by the end of the year, and should help to drive wholesale revenues. For Free People wholesale, there is significant opportunity to increase the domestic business through category expansions like FP Movement and denim.

4. International Growth Potential: URBN believes Anthropologie has the potential to derive half of its sales from outside the United States in the long term. Currently, all of the international sales are obtained from the U.K., but the brand is in the process of expanding in other countries, including opening its first store in Germany later this year. For its eponymous brand, in Europe, the brand opened its first freestanding store in Paris in February, and a first franchise store in the outskirts of Tel Aviv was launched in April. The company plans to open two additional stores in Europe and facilitate the opening of several additional franchised stores in Israel. For its Free People brand, the company intends to open its first two stores in Europe later this year or early next year.

5. Lower Markdowns: The management noted that the “total company markdown rate in Q1 was the lowest of any quarter in the last ten years.” This resulted in higher AUR (Average Unit Retail), one of the factors that resulted in positive store comps. A better assortment, higher consumer spending, and disciplined inventory control helped the company keep the discounting low. The company feels there is still scope for a reduction in this metric, and has stated that the lower markdown trends have, in fact, strengthened in the second quarter to date.

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