Urban Outfitters Reports Another Strong Quarter, Outlook Seems Bright

by Trefis Team
Urban Outfitters
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Urban Outfitters (NASDAQ:URBN) has been among the top performing companies in the retail sector this year, and this continued in Q3 2019 (three months ended October 2018). The apparel retailer posted a 9% growth in revenues and an over 70% increase in earnings, with both metrics exceeding expectations. The apparel retailer reported strong growth in all three of its brands, noting positive comps for each of them in all three quarters reported in FY 2019, as a result of increased average unit selling price and higher units per transaction. In the retail segment, sales increases were seen in both the online and offline channels, with the former leading the way with double-digit growth in each of the brands. Higher sales and reduced markdowns helped to improve the margins, which together with a substantial decline in the tax rate, helped boost the earnings. Given the promising underlying trends, a strong finish to URBN’s financial year looks highly likely.

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 Urban Outfitters’s Performance In Q3 And Estimating Its Fair Price 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: URBN has noted mid-single digit comps growth in the fourth quarter-to-date. A strong economy, improved consumer confidence, and low unemployment, which has prompted positive sales trends in the first three quarters, should continue to benefit the company. Moreover, the factors that benefited the gross margin, namely reduced markdowns and leverage in store occupancy costs, are anticipated to continue in Q4, helping the company post an improvement in the metric by a similar amount as in Q3.

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 reaching 40% of the retail sales, 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. 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 19 Nordstrom stores and online, along with select assortment in an additional 60 stores, further expansion can be anticipated 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. In Q3, the Urban brand also entered wholesale with the launch of its BDG collection through nordstrom.com domestically and Zalando in Europe.

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, almost 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 second quarter and one in Israel later this year. For its eponymous brand, two new stores were opened in the quarter – one in Europe and one in North America – and a third franchise store in Tel Aviv. The company plans to open additional stores in Europe, as well as several additional franchised stores in Israel. For its Free People brand, the company opened its first store in Amsterdam early in the fourth quarter, and intends to open a store in London before the end of the financial year. In Europe, the retailer plans to open 10 to 20 new stores across all brands in each of the next two years. With a current base of 61 stores, the plan is for its European store count to exceed 100 in three years.

5. Lower Markdowns: The management noted a lower markdown rate in the third quarter, similar to the preceding two quarters. 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.

6. 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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