What's Driving Sales at This Retailer?

Ash 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) 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 has increased its product assortment up to 46% on the DTC channel and increased its web traffic by 20% in the 1st 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 stores, nine new Anthropologie stores, and 14 Free People locations. It will look for more international expansion this year with five new Urban Outfitters 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 Gap (NYSE: GPS) and Express (NYSE: EXPR). Gap 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. Gap's franchise stores have a high ROI opportunity with minimum risk. The company will increase franchise locations this fiscal year with 75 new locations.

Express has focused on communicating its valued position through specified price points. It has reported better results than the consensus estimates in first quarter of 2013, but has had to compromise on margin levels due to high promotional expenditure. Its comps growth was driven by its 48% growth in online sales, above the 44% growth in the fourth quarter of 2012. The company has taken strong initiatives for online sales growth and has used apps, social media, and email to attract customers. It will increase its stores base this year and has identified 13-16 locations for new stores in the U.S. and Canada.

Companies

P/S ratio

Op. margin

1 Yr. Fwd. P/E

Urban Outfitters

2.39

11.26%

19.36

Express

0.95

11.54%

12.71

Gap

1.40

14.21%

14.77

Source: Google Finance

Urban Outfitters has reported an operating margin of 11.26%, but it has the highest one-year forward P/E among the three mentioned peers at 19.36. Express has the lowest P/S ratio of 0.95 and the lowest forward P/E of 12.71. Gap has the highest operating margin of 14.21% and a P/S ratio of 1.40.

Conclusion

Urban Outfitters has focused on its DTC channel to drive sales growth. It has increased its online product categories and has targeted to increase online sales up to 50% of total sales in the long term. Its Anthropologie and Urban Outfitters brands have been able to attract customers, and will continue to drive sales in future. The company has plans to increase its stores base in the U.S. and internationally. I consider Urban Outfitters a “buy.”

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Ash Sharma has no position in any stocks mentioned. The Motley Fool recommends Urban Outfitters. 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!

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