Improvement Expected In All Segments For Urban Outfitters In The Second Quarter

by Trefis Team
Urban Outfitters
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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 in mid-June that the comparable sales growth in the retail segment had been mid-teens positive. Consequently, substantial growth in the revenue and earnings metrics are expected in the second quarter – sales to grow 12.2% and EPS to increase by a whopping 75%.

We have a $47 price estimate for Urban Outfitters, which is in-line with the current market price. The charts have been made using our new, interactive platform. If you don’t agree with our analysis, you can click here for our interactive dashboard on Our Outlook For Urban Outfitters In FY 2019 to modify our driver assumptions to see what impact it will have on the company’s revenues, earnings, and price estimate.

Factors That May Have An Impact In The Quarter

1. Strong Sales Trend Reported: In its first quarter earnings conference call, the management stated that it expects to deliver sales comps fairly consistent with the first quarter rate. The easier comparisons versus last year, together with the current sales trends seen by the company, prompted the positive outlook. Moreover, the factors that benefited the gross margin, namely reduced markdowns and leverage in store occupancy costs, are expected to continue in Q2, helping the company post an improvement in the metric at a similar rate as in Q1.

2. Higher Retail Sales: According to the U.S. Census Bureau, retail sales were up 6.6% in June 2018 versus June 2017, and 0.5% higher than May 2018. Categories with strong growth included clothing/clothing accessories, which rose 5.1% as compared to the previous year, a factor that should bode well for apparel retailers.

3. 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.

4. 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.

5. 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.

6. 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.

7. 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 in the first quarter earnings conference call it was stated that the lower markdown trends had, in fact, strengthened in the second quarter to date.

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