Can Digital Segment Drive Growth For Urban Outfitters In Q4?

by Trefis Team
Urban Outfitters
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Urban Outfitters (NASDAQ: URBN) has been one of the top performing retail companies of late, and has seen robust growth in the fiscal year so far. The apparel retailer posted an impressive 12% growth in revenues and its earnings more than doubled during the first nine months of fiscal 2019 (year ending January 2019), with both metrics comfortably exceeding expectations. This performance was primarily attributable to sustained comps growth for all three of its brands – driven by higher average unit selling price and improved units per transaction. These underlying trends, coupled with a solid holiday season and a significant decline in tax rate, should drive its near term results. As a result, we expect the company to report another strong quarter when it announces its Q4 earnings on March 5, and end FY 2019 on a high note. Below we take a look at what to expect from the retail giant in Q4.

We have a $47 price estimate for Urban Outfitters stock, which is slightly higher than the current market price. Our interactive dashboard on what to expect from Urban Outfitters in Q4 details our expectations for the company’s earnings. You can modify the charts in the dashboard to gauge the impact that changes in key drivers would have on the company’s earnings and valuation, and see all of our Consumer Discretionary company data here.

Factors That Should Drive Q4 Results

1. Solid Sales Trend: Urban Outfitters’ retail segment has consistently delivered mid-single digit comps growth and has been its consistent performer through fiscal 2019. This solid growth was largely due to better-than-expected comp sales growth across Free People, Urban Outfitters, and Anthropologie brands. Additionally, improved consumer outlook, healthy economy, and lower unemployment rates should continue to benefit the company in Q4. Further, we expect the company to benefit as a result of a solid holiday season and further drive its top line. 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 exceeding 40% for the first time in Q4 2018 (quarter ended January 2018). This strength continued through fiscal 2019, 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 well 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 through the first nine months of fiscal 2019, 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 15 Nordstrom stores and online, along with select assortment in an additional 60 stores, and further expansion can be anticipated by the end of the year. This should help drive wholesale revenue in Q4. For Free People wholesale, there is significant opportunity to increase the domestic business through category expansions like FP Movement and denim. In addition, the recent launch of its BDG collection through domestically and Zalando in Europe, should provide for decent medium-term opportunities.

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 stores in Germany and one in Israel later this year. In addition, the company plans to open several new stores in Europe, as well as multiple franchised stores in Israel. For its Free People brand,  URBN 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 (early 2019). Moreover, for Europe, the retailer plans to add 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.

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