This Apparel Retailer Continues to Impress

Mark is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Urban Outfitters (NASDAQ: URBN) continues to impress the market with the implementation of its business strategy. The company's catalog and online sales now comprise 24% of total sales, which is up from 14% five years ago. The company is doing a great job in selling its apparel directly to its customers, which many retailers cannot say.

What's so special?

Urban Outfitters is known for its hip merchandise. The company's apparel designs incorporate influences from past decades. The brand seeks to create an emotional bond with its targeted demographic for each brand. Its stores include Urban Outfitters, Anthropologie, Free People, Terrain, and BHLDN. Its core customer is generally young and is familiar with the latest trends.

The company has built a loyal customer base and that's showing in its sales. So far into the second quarter, the company has reported that retail sales are increasing in the high single-digit range. This is better than expectations for a 7.5% increase. The strong sales trend seen in the first quarter of this year is continuing.

In the first quarter, the company posted record sales of $648 million, an increase of 14%. Comparable-retail sales increased 9%. Gross profit for the quarter increased 18% to $239 million. Gross profit margin came in at 36.8%.

What is the outlook going forward?

This year Urban Outfitters will open 35 to 40 new stores. Of those, 25 will be stores opened outside of the U.S.

In addition, the online segment looks particularly appealing to me as the company has done a great job with its web presence and mobile initiatives. On a year-over-year basis, web traffic is up 20%. Mobile sessions have more than doubled, and customer conversion has improved by 56 basis points. The company continues to find better uses of data analytics and personalization to get to know its customers better. By tailoring product offerings to customers' wishes, sales are likely to increase in this segment.

What about competition?

There's no shortage of competition in the specialty apparel market. One of Urban's main competitors is American Eagle Outfitters (NYSE: AEO). American Eagle targets men and women between the ages of 15 and 25.

The problem with American Eagle is that it is dependent on the 15- to 25-year-old demographic. These customers are notoriously fickle. Urban Outfitters has five different retail brands in its portfolio and is not as dependent on fickle teenagers.

In the first quarter, American Eagle reported numbers that came in short of last year's results. Net profit was $28 million compared to $40 million in the prior year. Net revenue fell 4%. Sales in stores open at least a year fell 5%. A Citi investment research analyst just downgraded American Eagle Outfitters citing increased competition that could lead to market share loss. I concur with this assessment and would pass on owning shares.

Another competitor is Abercrombie & Fitch (NYSE: ANF). The retailer is best known for its preppy casual clothes that appeal to teenagers. The problem for Abercrombie is that preppy is out and hip is in. Tastes have changed and customers are trending toward brands like Urban Outfitters that are seen as being more hip.

The second problem for Abercrombie is that it realizes this and has made an attempt at changing. The problem is now it has alienated its core customer base that hate the brand's new styles. The brand's designers have yet to figure out a way to combine preppy and hip.

As a result of these problems, Abercrombie missed earnings expectations in the first quarter. Revenue fell 9% and comparable-store sales dropped 17%. The company lowered its full-year guidance and expects comparable-store sales to continue declining. Until comparable-store sales turnaround, I see further weakness in Abercrombie shares.

Foolish assessment

Urban Outfitters looks to be the place to be among these three apparel retailers. The company is executing is business plan and growing sales. That is a recipe for success and explains why Urban Outfitters has outperformed the market and shares are up over 44% in the past year.

The Motley Fool's chief investment officer has selected his No. 1 stock for the next year. Find out which stock it is in the special free report: "The Motley Fool's Top Stock for 2013." Just click here to access the report and find out the name of this under-the-radar company.

Mark Yagalla has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus