Urban Outfitters’ Digital Growth Aids In Delivering A Beat In The Second Quarter

by Trefis Team
Urban Outfitters
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Urban Outfitters (NASDAQ:URBN) is expected to be among the top performing companies in the retail sector once all companies report their second quarter numbers. The company handily beat consensus expectations on both earnings and revenues, reporting a 14% improvement in sales, with growth reported across the board, and a whopping 91% increase in the EPS, spurred by reduced markdowns and a lower tax rate. Comparable sales growth for the company came in at 13%, led by a 17% improvement at Free People, followed by 15% at its namesake brand, and 11% at Anthropologie, with the company noting positive comps at each of its brands for the second quarter in a row. This growth was spurred on by higher consumer spending, 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 third quarter-to-date, the comparable sales growth has been 10%. However, as the quarter carries on, the comparisons versus the previous year will get tougher, resulting in the comps improving in the high single-digits for Q3.

We have a $52 price estimate for Urban Outfitters, which is higher than 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 On The Future Performance

1. Strong Sales Trend Reported: In its second quarter earnings conference call, the management stated that it expects to deliver sales comps in the high single-digits. The slightly 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 anticipated to continue in Q3, helping the company post an improvement in the metric by an expected 100 basis points.

2. 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 second quarter as well, with all three brands reporting double-digit sales increases. 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. The company is also concentrating on its loyalty and rewards programs. While the successful implementation of these initiatives resulted in strong growth in the quarter, its benefit can be expected to continue in the future, as well.

3. Good Momentum In The Home Business: The Home products provided by Anthropologie delivered its 15th sequential quarter of positive comps in Q1, 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 continued in the second quarter, and is expected to remain strong, and should drive the brand’s sales in the coming quarters.

4. 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.

5. 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 in the quarter and one in Israel 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.

6. Lower Markdowns: The management noted that the markdown rate was the lowest ever for the second quarter. This resulted in higher AUR (Average Unit Retail), one of the factors that resulted in positive store comps, and an improved gross margin. 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, particularly in its Anthropologie brand.

7. Trialing Self-Checkout: URBN tested self-checkout at a store in New York, with customer reaction exceeding expectations, given its convenience. Moreover, this enables the company to reposition its labor to further service the customers, and “drive conversion on the selling floor.” Given its success, the Urban Outfitters brand intends to roll out this facility in other stores.

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