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Quick Take

  • Urban Outfitters’ sales increased by 8% during the holiday season 2013 on top of 15% growth witnessed during the same period of 2012
  • The retailer’s strong brand image and appealing product offerings helped it stay a step ahead of its competitors
  • Surge in online orders during the season helped Urban Outfitters’ growth since it attracts substantial web traffic (25% of its revenues come from online sales)

Teen apparel retailer Urban Outfitters (NASDAQ:URBN) recently reported strong holiday sales results despite the tough retail environment. The retailer’s sales increased by 8% during November and December, on top of 15% growth witnessed in the prior year’s holiday season. [1] Urban Outfitters’ strong brand recognition and appealing product offerings helped it drive store traffic even as U.S. buyers were hesitant to spend on apparel.

Although the retailer’s namesake brand struggled a little, healthy growth in Anthropologie and Free People was able to offset this impact. Moreover, as U.S. consumers preferred online shopping over store shopping this season, Urban Outfitters’ strong e-commerce channel boosted its sales.

Our price estimate for Urban Outfitters stands at $43, implying a premium of more than 15% to the market price.

2013 Holidays Weren’t So Happy For Apparel Retailers

Due to the impact of increased taxes, slow job growth, changing spending patterns, higher healthcare costs and gasoline prices, U.S. buyers spent cautiously last year. This was clearly visible in the recently concluded holiday season as the U.S. retail industry saw its weakest growth since 2009. Moreover, extreme weather conditions prevented buyers from completing their shopping. As a result, U.S. foot traffic declined by 19.9% for the week ended December 15, and 21% for the week through to December 22. ShopperTrak even predicted 10% fewer customers for Christmas 2013, as compared to the same holiday last year.

Overall, foot traffic during the holiday season decreased by a staggering 14.6%, which was significantly higher than ShopperTrak’s prediction of 1.4% decline. [2] Moreover, while U.S. buyers spent freely on electronics, furniture and building materials, they were hesitant to spend on clothing. According to a Reuters poll conducted before the holiday season, about 27% of consumers were planning to lower their spending on apparel this holiday season. Therefore, it is quite clear that the 2013 holiday season posed special challenges for apparel retailers.

However, Urban Outfitters Registered Strong Growth With Popular Brands

Despite the tough environment for apparel retailers, Urban Outfitters recorded strong growth as its products resonate very well with the customers. Although its namesake brand fumbled, due to missed fashion calls, growth of Anthropologie and Free People subdued the impact of Urban Outfitters‘ revenue decline. The retailer’s revenues increased by almost 8% along with a 3% rise in comparable store sales. The comparable retail segment net sales increased 21% at Free People and 11% at Anthropologie, while decreasing 6% at Urban Outfitters. In the wholesale segment, Urban Outfitters’ revenues increased by 21%. Overall, the company generated $716 million in revenues during the holiday season, which is its best performance so far.

Anthropologie, which accounts for more than 40% of the company’s revenues (assuming that its revenue contribution is same in online and store channel), has been impressing with its strong growth since its turnaround last year. Customers have responded positively to the brand’s new theme of sensual and feminine looks. Previously, it was more focused on preppy and quirky products. As a result of the positive customer response, Anthropologie has operated with more full priced sales, which has helped its results.

Moreover, with its strong and diverse supply chain of over 4,100 vendors globally, Urban Outfitters has responded to its customers’ needs in an effective way. New collections have hit stores on time, which has enabled the company to drive greater store traffic without offering heavy discounts.

E-Commerce Growth Also Helped

Urban Outfitters’ big direct-to-consumer channel played a crucial role in its strong revenue growth during the holiday season. In December, as bad weather conditions kept U.S. buyers away from the stores, they stayed home and bought more online. As a result, there was a heavy surge in online orders. This is evident from the fact that United Parcel Service (NYSE:UPS), which is one of the biggest player in e-commerce delivery, struggled to ship orders on time. [3] Abercrombie & Fitch (NYSE:ANF), which usually earns close to 15% of its revenues from e-commerce business, saw this figure escalate to 25%.

Since Urban Outfitters’ e-commerce channel is very strong and makes up about one-fourth of its net revenues, it was one of the biggest gainers from this trend. The retailer had made several investments in this channel with the expectation that Internet will play a key role during the holiday season. Towards the end of October, Urban Outfitters launched the first phase of Urban Outfitters‘ site redesign, which was focused on improving product presentations through story telling. The retailer also launched Anthropologie’s refreshed website, which improved the visuals considerably. Additionally, it overhauled its mobile apps, added a number of new features, and introduced generation 5 iPhone app Urban On. [4] The app was focused on engaging customers by leveraging their likes such as exclusive access to rewards and events. As Urban On saw tremendous success in its initial phase, it likely contributed to Urban Outfitters’ e-commerce growth during the holiday season.

Notes:

  1. Urban Outfitters Reports Record Holiday Sales, Urban Outfitters, Jan 9 2014
  2. U.S. retail sales up 2.7% in 2013 holiday season: ShopperTrak, The Economic Times, Jan 8 2014
  3. Behind UPS’s Christmas Eve Snafu, The Wall Street Journal, Dec 26 2013
  4. Urban Outfitters Preps For Holidays With Mobile Investments, Adage, Oct 9 2013

Disclosure: No positions

Source: Urban Outfitters Reports Record Holiday Sales Amid Retail Weakness