Urban Outfitters Needs To Focus

By Chad Henage - June 22, 2012 | Tickers: ANF, GPS, LTD, URBN | 0 Comments

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Urban Outfitters (NASDAQ: URBN) is a source of personal pain for me. I thought I did everything right. I researched the company and the numbers looked pretty good. I also used social media to my advantage by asking some friends if they like the company's stores. I got all positive responses and bought the shares at about $33. After a few disappointing earnings reports, I sold the shares in frustration and suffered a loss. So what did I do wrong? I forgot to ask the most important question. I asked my friends if they like the store and most of the answers were the same, “the store is great, they have cool stuff, but it's too expensive.” The company released earnings not long ago and I see some signs that I was right to sell Urban Outfitters. Let me show you what I've found.

Headline Numbers:

The company's headline numbers were pretty decent. Net sales were up 9% and EPS of $0.23 came in $0.03 above expectations. This would be a great report, but compared to some of Urban Outfitters competition, an earnings beat of $0.03 wasn't that much to write home about. For instance in the same quarter, Abercrombie & Fitch (NYSE: ANF) beat expectations by 50% and The Gap (NYSE: GPS) even beat earnings by about 2%. What worries me about Urban Outfitters is the company seems distracted.

Same Store Sales

A good example is while the company's namesake chain Urban Outfitters saw same store sales up 6%, and direct-to-consumer sales were up 15%, the other divisions did not impress. Free People same store sales were up just 2%, wholesale was up just 2%, and comps at Anthropologie were actually down 2%. The combination of these results equaled the 9% overall sales gain. With analysts expecting EPS growth in the next five years of 17%, sales growth in the single digits is going to make this a difficult task for the company. In addition, the company's plan for new stores just doesn't sound aggressive enough. In total, the company has about 442 stores. Take a look at the growth plans for each chain for this year:

You can see that the only chain that is getting a decent boost from new stores is Free People. Mind you, that's the same division that just posted a 2% increase in same store sales. Doesn't it seem like it would make more sense to put the big store push behind Urban Outfitters, considering that is where the same store sales growth is? There is a side note to this idea.

Social Media Exposure

Urban Outfitters has better credibility in social media. What I'm talking about is, take a look at sites like Pinterest and tumblr. Both sites are more heavily geared to image sharing and you'll see images of Urban Outfitters brand merchandise on these sites more than Free People or Anthropologie. Since there is such a strong connection between the visuals on these types of sites, and sales, it's not really surprising that Urban Outfitters is growing same store sales.

In Case of a Drop in Sales – Start A New Concept

This seems to be a common theme that retailers run into. Nearly every retailer I've ever followed has a problem with just building out one brand. It seems to have started with The Gap, which then expanded into Banana Republic, Old Navy and others. Rather than make the experience at The Gap the best possible, the company created other concepts. The same thing occurred at Limited Brands (NYSE: LTD). The company had the successful chain Limited, then started Victoria's Secret, Bath & Body Works, Express, Limited Too, and others with varying degrees of success. The point is, Urban Outfitters only has 201 total stores. Compare this to the over 2,500 stores The GAP company has in just the U.S. and it seems Urban Outfitters is underestimating the brand's appeal. So what should investors really expect from Urban Outfitters?

Conclusion

The first thing I would suggest is, don't expect the type of share buybacks that the company executed in the last year. It's not common for companies to retire nearly 12% of their outstanding shares. These buybacks used about $380 million from the company's balance sheet. With $362 million in cash and investments left, this won't happen again. Analysts are expecting nearly 12% revenue growth to generate about 17% EPS growth. I'm very worried about the top line growth number. With a full year plan that only calls for 3.17% new store growth, I don't believe that same store sales will be strong enough to make up the other 9% of this revenue growth. The fact that Free People is going to get bigger and has slower same store sales growth is a big part of my worry. Long story short, Urban Outfitters needs to focus on their primary brand. The Urban Outfitters brand has more stores, more brand awareness, and potentially better sales. Creating new concepts to try to fix a retailer is usually a way to get distracted and hurt your original concept. If Urban Outfitters focuses on what they are good at this could be a good turnaround story. If they continue to grow their distractions, I would avoid the stock.

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