Shares of niche apparel retailer Urban Outfitters, Inc. (NASDAQ:URBN) rallied recently, after the company announced that it was on track to report a strong first quarter of 2013, allaying concerns regarding the Philadelphia-based company’s mixed fourth quarter earnings.
Urban Outfitters, Inc. (NASDAQ:URBN) has had a great year, soaring 36% over the past twelve months, while many other apparel retailers have slumped. What are Urban Outfitters’ primary catalysts for growth, and can it keep riding the rising trend?
Fourth Quarter
For its fourth quarter, Urban Outfitters earned an adjusted $0.56 per share, or $83 million, up 107.4% from the prior year quarter. Despite the positive growth, earnings per share missed analyst consensus by a penny. Revenue rose 17.29% to $857 million and topped the consensus estimate of $848.24 million.
Sales Growth
All of Urban Outfitters, Inc. (NASDAQ:URBN)’ three primary brands – its namesake stores, Free People, and Anthropologie – posted positive comparable retail segment sales growth during the quarter for a company average of 11%. Its important to note that comparable retail segment sales and comparable-store (same-store) sales are not the same thing. Comparable retail segment sales, which the company has emphasized, combines regular same-store sales with direct-to-consumer sales, which also include online purchases.
Under this metric, Urban Outfitters’ namesake stores, which offer kitschy, ironic and humorous apparel and merchandise, reported 11% growth. The stores are best known for catering to “hipster” fashion, which draws heavily from retro influences, such as classic video games and cartoon characters. Meanwhile, Anthropologie, its trendier female brand, which also sells gifts and beauty products, grew by 7%. Free People, which caters to a younger female demographic, reported 37% growth.
While all that growth sounds robust, Urban Outfitters, Inc. (NASDAQ:URBN) announced that its company-wide same-store sales were flat from the prior year. What happened? Although direct-to-consumer sales rose 44%, same-store sales flatlined due to increased returns of direct-to-consumer products at brick-and-mortar locations, which reduced total same-store sales. In other words, people returned so much stuff that it was unable to grow its mature stores at all. CFO Francis Conforti noted that total same-store sales would have been positive if it weren’t for direct-to-consumer returns at stores. Worse yet, a 2% increase in transactions was completely offset by a 2% decline in average unit price.
Slowing growth, lower prices and more returns certainly sound hazardous for Urban Outfitters, but should longer term investors be concerned? At this point, investors should study the company’s revenue growth, inventory levels and margins for signs of weakness.
Right away we can see that Urban Outfitters, Inc. (NASDAQ:URBN)’ revenue and inventories are steadily rising in a cyclical trend. Inventories tend to outpace revenue growth for most of the year, spiking near the holiday season before strong sales reduce the inventories to more stable levels. During the fourth quarter, inventories rose 13% to $282 million.
This means that Urban Outfitters, just like many other apparel retailers, relies heavily on a successful holiday season to keep growing. The company’s margins and profit growth tell a similar tale.
Look on the bright side
Although flat same-store sales have raised some concerns regarding Urban Outfitters’ growth prospects, the company opened ten new stores during the quarter, which drove a $19 million increase in non-comparable store sales. Its strong growth in the direct-to-consumer channel, which has also been a major growth driver for industry peers Abercrombie & Fitch Co. (NYSE:ANF) and The Gap Inc. (NYSE:GPS), is also extremely encouraging.
Urban Outfitters, Inc. (NASDAQ:URBN)’ increased growth in this channel was a direct result of heavier investments in fulfillment centers, technological advances, product offerings and the addition of new creative staff. This produced a better selection of seasonal products, a wider range of product categories, more creative catalog designs and web-exclusive products.
It also assigned the responsibility of fulfilling web-based orders to the nearest brick-and-mortar retailers, which helped it generate $12 million in online orders during the quarter. However, this growth has been a double-edged sword – it also caused the aforementioned decline in same-store sales during the quarter.
Between 2008 and 2011, Urban Outfitters’ direct-to-consumer sales rose at an average annualized rate of 26%. Yet in the third and fourth quarter of fiscal 2013, that figure rose to 36% and 44%, respectively, showing that its long-term investments have paid off. Meanwhile, Gap posted 28% direct-to-consumer growth in its fourth quarter, up from 23% in the previous quarter. Abercrombie & Fitch Co. (NYSE:ANF) fared far worse with 5% growth.
New initiatives
Encouraged by strong direct-to-consumer growth that has outpaced its rivals, Urban Outfitters is also launching a mobile app for Anthropologie in fiscal 2014. It will also redesign its Urban Outfitters and Anthropologie websites and introduce a new loyalty program with cash back rewards. The company has also added a social media aspect to its Free People brand with FP Me, which allows customers to create online profiles and share favorite styles and collections with each other. All of these initiatives should have a positive impact on the growth of the direct-to-consumer channel.
Things are also looking bright for Urban Outfitters’ first quarter. In an SEC filing, the company stated that comparable store sales in the first two months of the quarter starting on Feb. 1 have risen in the “high single digits.” That means that if sales hold steady, the company is on track to at least meet the 9.1% same-store sales growth that the analysts polled by FactSet are expecting.
In contrast, Abercrombie’s same-store sales declined 14% internationally and 1% in the United States. Meanwhile, Gap’s company-wide same-store sales slid 2%. Suddenly, Urban Outfitters’ flat to high-single digit growth looks pretty robust by comparison.
Versus Competitors
Compared to Abercrombie & Fitch and Gap, Urban Outfitters, Inc. (NASDAQ:URBN) has a tiny footprint. The company owns 215 namesake stores, 180 Anthropologie stores, 77 Free People stores and two BHLDN locations for a total store count of 481. Abercrombie and Gap have over 1,000 and 3,200 locations, respectively.
In the coming year, Urban Outfitters plans to open 29 new locations in the United States and eight new stores in Europe. It is also looking to use joint ventures, partnerships or licensing agreements to penetrate global markets, where it is much less recognized than either Abercrombie or Gap’s three primary brands – Old Navy, Gap and Banana Republic.
Urban Outfitters inked an agreement last year with World Co. Ltd. to distribute its Free People label in Japan. World Co. Ltd. operates over 2,700 stores across Asia, which could help spread its brand across the region.
This final chart highlights Urban Outfitters’ strengths in comparison to its rivals.
| Forward P/E | Price to Sales (ttm) | Return on Equity (ttm) | Debt to Equity | Profit Margin | Qty. Revenue Growth (y-o-y) | Qty. EPS Growth (y-o-y) | |
| Urban Outfitters | 17.81 | 2.01 | 19.61% | No debt | 8.49% | 17.30% | 110.30% |
| Gap Inc (NYSE:GPS). | 12.23 | 1.05 | 40.18% | 43.06 | 7.25% | 10.30% | 61.00% |
| Abercrombie & Fitch | 11.26 | 0.80 | 14.47% | 3.60 | 5.84% | 10.50% | 784.50% |
| Advantage | Abercrombie | Abercrombie | Gap | Urban Outfitters | Urban Outfitters | Urban Outfitters | Abercrombie |
Source: Yahoo! Finance, 4/3/2013
In my opinion, Urban Outfitters, Inc. (NASDAQ:URBN)‘ clean balance sheet, strong margins, and robust top and bottom line growth all justify the stock’s higher P/E ratio, which is slightly higher than the industry average of 17.37. In other words, I believe Urban Outfitters will continue growing over the long term, and 2013 might just be the year that hipster clothing crushes preppy, clean cut fashions.
The article When Quirky Hipsters Crush the Preppies originally appeared on Fool.com and is written by Leo Sun.
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