Urban Outfitters: Lean Inventory and High Product Turnover Are Key

Includes: AEO, ANF, GPS, URBN
by: Trefis

Urban Outfitters (NASDAQ:URBN) is a specialty retailer that competes with players like Gap (NYSE:GPS), American Eagle (NYSE:AEO) and Abercrombie & Fitch (NYSE:ANF). The company operates two major brands, ‘Urban Outfitters’ and ‘Anthropologie’, which contribute around 29% and 28% respectively, to the $39 Trefis price estimate for Urban Outfitters’ stock.

Urban Outfitters stores offer fashion apparel and accessories, primarily targeting the 18-30 year old demographic. The Anthropologie stores offer apparel and accessories for contemporary and sophisticated women, primarily in the 30-45 year old demographic .

Urban Outfitters’ business model has two key features – lean inventories and high product turnover. These features help the company to have new products in stores with high frequency and reduce the need to for heavy discounting to clear inventory. We believe that these factors helped the company fare well during the recent economic downturn and will continue to play an important role in the growth of metrics like revenue per square foot.

Lean Inventories and High Turnover Rates Bring New Products to Stores Quickly

As a result of its high product turnover rate, there are new products in Anthropologie and Urban Outfitters stores every few weeks instead of a matter of months, which is the standard for retailers like Gap. This gives customers a reason to visit these stores more often, as there are always new products to see.

Lean inventories and high turnover means that the stores do not have excess products at the end of a season, which they would have to clear through discounts and promotions. This helps the company to drive sales without excessive discounting.

Urban Outfitters and Anthropologie Stores Fare Well in Downturn

These strategies have helped the company during the recent economic slowdown. Between 2007 and 2009, the revenue per square foot for Urban Outfitters and Anthropologie stores remained relatively flat, whereas such metrics for competitors like Abercrombie & Fitch declined more significantly.

In 2009, the revenue per square foot for Anthropologie stores stood at nearly $750, which was double that of Abercrombie & Fitch stores and around $300 higher than that for Banana Republic stores.

The revenue per square foot for Urban Outfitters stores was around $150 lower than that for Anthropologie stores, but still around $200 higher than that of Gap stores.

We expect revenue per square foot for Anthropologie and Urban Outfitters stores to continue to grow over our forecast period, in part, as a result of the company’s rapid turnover of inventory as well as the benefits to the retail industry of broader economic recovery.

You can modify the Trefis forecasts for revenue per square foot shown above to see the impact of changes to our forecast on Urban Outfitters’ stock.

Disclosure: No positions