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Urban Outfitters (NASDAQ:URBN) reported strong Q1 fiscal 2014 results despite the negative impact of the prolonged winter. The retailer’s revenues and comparable store sales (includes e-commerce) grew by 14% and 9%, respectively, thanks to healthy growth in the direct-to-consumer business and the rejuvenated performance from its Anthropologie brand. We expect these segments to continue to play a vital role in Urban Outfitters’ growth as the company is looking to further strengthen them. Additionally, its efforts to create an efficient supply chain and maintain strong relationships with its customers will also help.

Direct-To-Consumer Business Remains The Key Growth Driver

Urban Outfitters has seen robust growth in its direct-to-consumer business. The segment’s revenues have increased at an average annual rate of 25% for the last four years, and the pace did not slow down this quarter either. Going forward, we expect this trend to continue to be driven by increased investments in fulfillment capabilities, technological advancements, creative catalog designs, seasonal products offerings, increased product categories and web-based exclusive products. [1] [2]

In the first quarter, Urban Outfitters expanded its product assortments on the Internet by almost 46% and this has worked well so far. For instance, Free People’s intimate apparel line saw healthy growth and now contributes over 15% to the brand’s e-commerce revenues. [3] The retailer’s strategy of offering web-exclusive products has also been successful.

Last year, Urban Outfitters’ web launch of Anthropologie petites garnered excellent customer response and forced the retailer to test this product in its stores. [3] Additionally, the pick, pack and ship initiative, which allows the fulfillment of web orders with inventory from the nearest located store, also helped the company. Towards the end of fiscal 2014, Free People brand launched the "FP Me: website to improve customer engagement. Within the first three months, more than 10,000 photos of people wearing the brand were uploaded on the site. [3]

As a result of these efforts, Urban Outfitters’ web traffic grew by over 20% in Q1 fiscal 2014. This led to an improvement of 4% in direct channel contribution to the retailer’s overall revenues. [3] The channel saw a 46% increase in the number of new customers and mobile sales transactions almost doubled during the quarter. Also, the conversion rate of mobile sessions improved by 56 basis points. It is apparent that the direct-to-consumer channel is likely to remain the key driver for Urban Outfitters’ growth in the near term, finding further support from the launch of Free People brand’s e-commerce website in Japan later this year.

Revival Of Anthropologie Brand Is A Good Sign

In fiscal 2012, there was a drastic decline in Anthropologie’s revenue per square feet due to an imbalance in women’s apparel product mix. The same issue weighed on the brand’s growth in fiscal 2013 as well. However, during Q1 fiscal 2014, Urban Outfitters added a greater balance to the brand’s product mix. Anthropologie shifted its focus from a preppy and quirky look to much softer, sensual and feminine looks, which resonated well with customers. The retailer also added more product categories to the brand such as weekend casuals and best-to-dinner wear. As a result, the company saw a significant rise in Anthropologie’s demand despite the impact of prolonged cold weather which has hampered the sales of spring clothing for many retailers. This led to fewer markdowns, which translated into comparable store sales growth of 8% for the brand and net income growth of 39% for the company overall. [3]

Efforts To Build Strong Relationship With The Customers

Urban Outfitters is increasing its investment in technology, web and store initiatives as well as marketing in order to serve its customers better. The retailer has undertaken a thorough study of store workflow and staffing model with the idea of improving its front-of-house activities. [3] It is also making some tweaks to its merchandise, design, store operations and marketing teams, and increasing the head count of marketing and customer analytics.

Urban Outfitters stated that it will rigorously work on improving the product appeal and shopping experience and become nimble in product design and accurate with product distortions and store allocations. [3] The retailer is looking for more ways to interact with its customers efficiently. These efforts are indicative of Urban Outfitters' strategy to build a strong company-customer relationship.

An Efficient Supply Chain Will Strengthen The Retailer’s Backbone

In order to remain responsive to changing trends and avoid superfluous inventory, Urban Outfitters is looking to reduce its inventory turnover. It recently implemented a new technology that allows a single view of inventory across all channels. The retailer believes that this initiative provides an opportunity to substantially reduce the lead time. Urban Outfitters is also testing different supply chain, brand design and communication initiatives that will help it reduce the time between order placement and market delivery. [3] If the company is able to successfully implement these strategies, not only can it improve its financial performance but can also offer its customers the latest products in a timely manner.

Our price estimate for Urban Outfitters stands at $46, implying a premium of about 5% to the market price.

Disclosure: No positions.

Source: Online Business And Rejuvenated Anthropologie Brand Bolster Urban Outfitters' Results