Is Urban Growth Unstoppable?
Elizabeth is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Urban Outfitters Inc. (NASDAQ: URBN) shocked and thrilled recently as second-quarter revenue shot up 11% and earnings 8.1%, trampling analyst estimates of 33 cents per share with an unprecedented 42 cents per share. Traders ravenously jumped aboard the Urban train; the stock price skyrocketed more than 17% before the market even opened on the morning of August 21, and was finally settling around $37.19 by market close the next day.
I’m a long time fan of both Urban apparel and stock, and I recently outlined several reasons why it’s got an exciting yet solid business model with unlocked potential for long-term growth ahead- most notably, its highly effective demographic targeting and almost uncanny understanding of its consumer base. Perhaps I was even a bit too pessimistic: I specifically stated that I wasn’t expecting Urban stock to jump 25% overnight anytime soon. Sure, at $37.19, the stock has only gained nearly 19% since Monday evening, and it’s now one of the largest growers in the Dow Jones index this week.
The company’s growth, both in terms of its bustling $676 million in net sales and its stock price, is stellar by any stretch of the imagination. But will Urban continue to hit new 52-week highs as we head into back-to-college season, or will its price fall flat after heightened expectations and earnings failures lead to disappointed investors? 18.8% is, after all, a huge two-day gain. Is it sustainable?
One potential party pooper for the Urban rally stems from slightly disappointing figures for comparable store net sales, ringing in at negative 1%, opposed to positive 4% for comparable retail segment net sales. A 4% decline in average unit selling price shows that consumers are buying products for cheaper- and while that certainly leads to high-fives across many a college campus, it’s no good for company profits- or for investors’ portfolios. What gives?
Every time I walk by my local Urban, neon and rainbow-striped signs alert me to the start of a new sale: 30% off accessories, half-off cardigans, extra 50% off clearance items. While that definitely draws in customers, Urban can oftentimes get carried away with discounting. After the J.C. Penney Company, Inc. (NYSE: JCP) fiasco, the last suggestion I would ever propose to even my least favorite retail company is the elimination of promotions and clearance sales; JCP's newly-implemented business model ended up producing losses of 37 cents per share on less-than-stellar revenue of $3.07 billion, far worse than analyst expectations of $3.20 billion and a loss of only 25 cents per share. Rather, the company should be more selective in its product assortment to avoid the needless discounting of items that customers never wanted in the first place.
Much as I love Urban, I’ve had the misfortune to behold some of the most frightening merchandise I’ve ever seen strewn across the clearance racks. Even though I can get a rayon sweater adorned neck to waist with appliqued, upside-down Christmas trees for $4.99 in April, I’d gladly pay several times that for trendier season-appropriate merchandise. The better the company selects new apparel and accessories, the more customers will be willing to pay- and the happier they’ll be. CEO Richard Hayne has caught on; inventory has fallen 5% in the past year, and future plans set a path for the further optimization of inventory space.
The second disappointment is Anthropologie’s flat comparable retail net sales, compared to 12% for Free People and 6% for Urban Outfitters. While the stores’ visual displays are artistically stunning and the clothes high quality, trendy, and unique, customers pay a premium for these luxuries- a very, very high premium that many members of its target demographic aren’t regularly willing to pay. For $100 at Urban Outfitters, a customer can walk out with a stylish outfit, maybe even complete with accessories; in Anthropologie, that same $100 might get you a decorative pillow, one half of a blouse, or one eleventh of a nightstand (yes, I actually saw a nightstand that cost $1100 once). Anthropologie, in short, needs to lower prices if it wants to share in the overall success of Urban Outfitters- and the good news is that Urban’s management has fully realized this and designed plans to return prices to their 2010 levels, before the store was slammed with rapidly rising prices.
Now for the good news: direct-to-consumer sales surged 22.3% to $137.7 million, and Urban’ set to open 51 new stores by the end of fiscal 2013. As always, Urban’s perfected demographic targeting is what steps the company up from competitors like American Eagle Outfitters, Inc. (NYSE: AEO) and Gap Inc. (NYSE: GPS). While American Eagle recently hit a home run with earnings rising 62% in the second quarter, its teen demographic is too narrow to support growth equal to or surpassing that of Urban's; the exceptional growth in the past quarter was a result of a temporary activation of "damage control mode" after earnings plunged 11% back in 2011. On the other hand, Gap needs to narrow its focus; while it's done a great job of marketing its signature products for its Banana Republic and Gap lines, the lackluster performance of Old Navy proves that one company can't do everything- men's, women's, children's, even pets', for crying out loud- while maintaining a stable business model.
Meanwhile, Urban's got the demographics down to a science; what better way to appease technologically-savvy, urban customers than with special web-only items and online discounts? And how to excite the newly-situated residents of up-and-coming cities than with exciting new retail locations? (Although it should be wary to not overextend into every Boston ‘burb and Idado potato farm, should it lose its aspect of esotericism and regress into an overpriced Wal-Mart Stores Inc. (NYSE: WMT). With over 4,500 stores- more than ten times as many as Urban- and a product stock of more than 175,000 items ranging from clothing to groceries, we're clearly not dealing with specialized demographics here.) Do these upsides outweigh the comparable sales and Anthropologie misses?
Yes- insane revenue and profit figures prove it! Urban recognizes where it needs to streamline its business model, and once the proposed changes are fully enacted, my money says that Urban’s going to be unstoppable in the future. Skinny jeans, oversized sweaters, and a fat investor’s portfolio- what more is there to possibly want from a retail company?
LizPowers has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. 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.If you have questions about this post or the Fool’s blog network, click here for information.