An SEC inquiry released on Friday January 17th revealed that the SEC had questions about Urban Outfitter's (URBN) disclosure of same-store sales growth breakdown between the retail and direct-to-consumer (meaning online and catalog sales) channels. In the company's response, URBN declined to provide a breakdown of comparable sales between in-store and direct-to-consumer channels, claiming the distinction was meaningless to investors, because of the company's "omni-channel" strategy. URBN's response raises numerous questions, among them: is URBN trying to limit competitive understanding of the omni-channel strategy's effectiveness, or is URBN trying to hide the disclosure of unpleasant results in the retail channel?
URBN's omni-channel strategy means that purchases, fulfillment, and returns can be accomplished through a mixture of both channels for any given sale. According to the company, this integration means that no meaningful distinction can be made between online and in-store sales.
The Wall Streeet Journal on January 16th quoted URBN CFO Frank Conforti in an article that discusses how the declining foot traffic paradigm is likely here to stay, with weakening traffic at, among others, Best Buy (BBY), WalMart (WMT), Target (TGT), and Express (EXPR). Other retailers, such as Home Depot (HD), are choosing to focus more on online operations than on new store openings.
While URBN's omni-channel model was not specifically discussed, recent results suggest that URBN is effectively integrating online with bricks and mortar, as revealed by continued growth in comparable sales. Still, investors will want as much detail as they can get to evaluate how well URBN is navigating changing shopping patterns.
In their response to the SEC inquiry, URBN declined to provide significant financial detail about the dollar growth coming from in-store versus on-line purchases. URBN admits that it does in fact track and report such a breakdown of sales for internal reporting purposes, but doesn't feel that investors would benefit from the information, because their strategy has "virtually erased the boundaries among the store and direct-to-consumer channels". In order to demonstrate the meaninglessness of the distinction, URBN said it will even stop reporting on the two channels separately in internal management reports.
This raises important questions. Why limit the disclosure of this topic, when the data was readily available internally? Does URBN want to hide the success of the strategy from competitors in order to delay copycats, or do they wish to mask deteriorating in-store sales? Is the decision to change the internal reports truly indicative of lack of materiality between on-line and bricks-and-mortar, or is it a short-sighted decision made solely to avoid having to disclose the data?
Surely the tectonic shift underway in retail shopping patterns would warrant very careful internal analysis of consumer behavior around in-store versus online sales, and the ways in which customers make use of mixed-channel fulfillment and returns capabilities. Surely investors would like as much data as possible to try to understand how well URBN is dealing with these change, not least to gauge the likelihood of impairments or other losses due to declining foot traffic.
URBN investors should hope that the limited disclosure on this topic is designed to delay competitors' copying their omni-channel strategy, not to delay disclosure of declining fundamental performance.