Direct Channel And Holiday Sales Boost Urban Outfitters' Earnings

| About: Urban Outfitters, (URBN)
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Urban Outfitters (NASDAQ:URBN) reported a 17% increase in Q4 fiscal 2013 revenues, driven by strong growth in direct-to-consumer business and record holiday sales. With its seasonal product offerings, edgy catalogs and retro styled products, Urban Outfitters was one of the few retailers that performed well during the weak holiday season. Going forward, we expect the company to do well with a strong focus on the direct-to-consumer channel, global store expansion and strong marketing strategies. Additionally, better inventory management should complement its direct and retail store channels.

Strategies To Power Direct-To-Consumer Channel Should Help

Currently, the U.S. apparel industry is being driven by strong growth in the direct-to-consumer business. Key players such as Abercrombie & Fitch (NYSE:ANF) and Gap (NYSE:GPS) have reported a substantial rise in direct-to-consumer revenues in their latest results. Interestingly, Urban Outfitters’ direct-to-consumer revenue growth has accelerated in the recent past due to investments in fulfillment capabilities, technological advancements, product offerings and creative execution. During the period 2008-2011, the retailer’s direct-to-consumer revenues increased at an annual average rate of 26%. However, this figure surged to 36% in Q3 and 44% in Q4 fiscal 2013. Let’s look at some strategies that will continue to fuel this growth in the future.

Urban Outfitters’ initiatives such as the creative design of catalogs, seasonal products offerings, increasing product categories and its web-based exclusive products will continue to play a vital role. Additionally, the pick, pack and ship initiative, which allows fulfillment of web orders with inventory from the nearest located store, has been a revelation for the retailer. Urban Outfitters stated that without this initiative, online orders worth $12 million might have been cancelled in the fourth quarter. This along with the new fulfillment center in Nevada will help the retailer’s delivery responsiveness. Urban Outfitters witnessed a 100% increase in sales transactions through the mobile channel.

Encouraged by these results, the retailer plans to launch a mobile app for its Anthropologie brand in fiscal 2014. Given the increased usage of smartphones and tablets, this channel can be a valuable contributor in the future. Moreover, the company will redesign its Urban Outfitters and Anthropologie websites and launch a new loyalty program (cash back rewards on purchases).

This segment constitutes close to 40% of the company’s value according to our estimates.

Revamped Marketing For Better Customer Engagement

Urban Outfitters is looking to improve its brand marketing to better connect with customers. The retailer is reinforcing its data analytics team to make customer communication more actualized. Over the long run, Urban Outfitters plans to reduce its catalog circulation and promote web-based and digital communication. Moreover, the company is increasingly investing in image makers, marketers and stylists to conceive a fascinating brand experience for the customers. Once such example is FP Me by Free People brand, which allows customers to create online profiles, connect with fashion lovers and share various styles and collections’ photos. We believe that this will enhance company-customer interactions, which in turn will positively impact sales.

Increasing Global Footprint

The company is looking to expand its global footprint by primarily targeting underpenetrated U.S. and international markets. In the current fiscal year, Urban Outfitters plans to open eight retail stores in Europe and 29 in the U.S. Apart from this, it is looking to enter new markets with external relationships such as joint ventures, partnerships, licensing agreements and acquisition. One such initiative was last year’s partnership with World Co. Ltd. to market and distribute Free People brand in Japan. We believe this strategy can help promote the brand in other Asian countries too, as World Co. Ltd. operates more than 2,700 stores in the region. It won’t be surprising if that happens soon.

Our price estimate for Urban Outfitters stands at $41, which is roughly in line with the market price.

Disclosure: No positions.