Urban Outfitters, Inc. (URBN), The Gap Inc. (GPS): What’s Driving Sales at This Retailer?

Urban Outfitters, Inc. (NASDAQ:URBN)‘ stock price has increased by 54% in the last year. The company has taken growth initiatives and is moving ahead with technological enhancements to drive its sales growth. It has taken steps to create an omni-channel network and personalized services to increase online sales. It has reported EPS better than the consensus estimate for the first quarter of fiscal 2014 and its gross margin improved by 125 basis points year-over-year. It is investing in new technology to reduce inventory and lead time across all five brands. Now, let us discuss a few points that will play a key role in the company’s growth.

Direct-To-Customers (DTC) business will be a major growth driver

Direct-To-Customers business has been growing at an average rate of 25% over the last few years. It has continued to support sales growth in the first quarter of fiscal 2014. The company has focused on channel development and product assortment to increase sales. Dick Haynes, CEO, plans to increase DTC share by 50% in the next 4-5 years. The company has focused on capacity enhancement and a better online experience with increased product categories, catalog design, and seasonal offerings. Its web-exclusive products are growth drivers, as they provide an opportunity for the company to test products online before launching them in stores. Its DTC channel will drive growth in the long term with 200-300 bps higher margins and better sales than the stores.

Anthropologie and Urban Outfitters brands will attract customers

Anthropologie brand has shifted its product mix from more kinky to sensual, softer apparel and it has benefited from this shift. It has also increased product categories such as weekend casuals and best-to-dinner wears. It has attracted a broader customer base of working class and more mature women. It has also made products more affordable with lower price points and mark downs. Urban Outfitters, Inc. (NASDAQ:URBN) has increased its product assortment up to 46% on the DTC channel and increased its web traffic by 20% in the 1^st quarter. Its planned promos and mark downs in apparel will drive its sales growth through the DTC channel. These two brands will attract customers across the channels.

International expansion will drive long term growth

The company has opened seven new stores of different brands in the first quarter and has plans to expand its store base by 35-40 stores in fiscal 2014. It will open 16 new Urban Outfitters, Inc. (NASDAQ:URBN) stores, nine new Anthropologie stores, and 14 Free People locations. It will look for more international expansion this year with five new Urban Outfitters, Inc. (NASDAQ:URBN) and two new Anthropologie locations in Europe. Free People is the only brand that has presence and recognition in Asia. The company has also opened a store in Japan, which has delivered the best per-square-foot sales. It will also look to expand its other brands in Asia.

Peer analysis

In the Specialty Apparel segment, the other two major players are The Gap Inc. (NYSE:GPS) and Express, Inc. (NYSE:EXPR). The Gap Inc. (NYSE:GPS) has improved its operating performance in the last few quarters with low inventory levels, store rationalization and better online sales growth. The company reported good first quarter results and EPS improved by around 50% year-over-year. Online sale have increased by 27% in the first quarter and have significant growth opportunity with continued investment through omni-channel initiatives. The Gap Inc. (NYSE:GPS)’s franchise stores have a high ROI opportunity with minimum risk. The company will increase franchise locations this fiscal year with 75 new locations.