Fool on the Street: Urban Outfitters' New Terrain

A way to add color to a company's performance and plans is to be a fly on the wall at a Wall Street conference. In that spirit, I took a peek at what Urban Outfitters' (Nasdaq: URBN  ) CFO John Kyees had to say at Wachovia's recent Consumer Conference.

Growth with a difference
In its three concepts -- the namesake Urban Outfitters, Anthropologie, and Free People -- Urban Outfitters focuses on making its stores just a wee bit different from each other. Kyees described this approach as creating a "boutique-like environment," and it certainly differentiates Urban Outfitters from typical retail chains, whose stores look the same whether you're in Manhattan or Modesto.      

By year's end, Urban Outfitters plans to have 245 stores, and it sees potential for 750 stores across the three concepts. In other words, it can triple its store base before it reaches what it considers saturation. Most retailers aim for far more stores than that, but they're also not defining themselves by being different. Gap (NYSE: GPS  ) is a good example of a company that overexpanded years ago -- it has more than 3,000 stores.

There are more interesting tidbits in the growth department. For one, Urban Outfitters plans to dip its toe into Asia within three years. Kyees mentioned that Anthropologie will open its first Canadian store this year, venture into Europe in a couple of years, and will probably launch a wholesale brand yet this year.

Furthermore, consider Concept 4, which will be a home and garden retailer called Terrain. Kyees said Terrain won't be a growth vehicle for about three years -- and his guess was that ramping up this new business will cost about $2 million a year -- but the long-term expectation is that within 15 years it will have expanded to 50 stores, with each one bringing in as much as $20 million.

Since Terrain's green thumb veers off Urban Outfitters' beaten path, the next idea in the works -- Concept 5 -- "probably will be more consistent with what our other three concepts were," Kyess said. The actual concept of Concept 5 will be announced in 18 to 24 months.

Turning issues into opportunities
Anybody who has followed Urban Outfitters knows that things were tough last year, in part because of bad timing and execution of new fashion trends. The company was too early bringing new fashions to Urban Outfitters customers, and Anthropologie customers downright hated the new styles. That situation helped pressure margins because the company had to mark down merchandise.

The company also said its real estate strategy was costing it a lot of money. In response, Kyees said the company is reducing its construction costs by 20% this year and 10% next year, and it's been honing its real estate process so that it incorporates demographic details that help it analyze store performance and plan more wisely for new stores.

In another cost-cutting move, Kyees said the company intends to improve operating margins by 20% next year. (Operating margins took a hit during last year's malaise.)

The retailer has realized its namesake business is showing a tendency to find one key item and "ride it" for a season because that's easier than finding 20 different great styles. Having one hot, key item, though, is how Urban Outfitters sees its rivals doing things. That's not the way things have tended to work at Urban Outfitters, which tries to key into its customers' sense of individualism.

As Kyees put it, the company doesn't want its customer "to feel like she's seeing herself coming and going." I don't like to hear that this trend was happening, but I'm also glad to hear that the company has identified the problem and is working on it. None of Urban Outfitters' concepts has ever been about being just like everybody else.  

Opportunities abound
Kyees waxed enthusiastic about Urban Outfitters -- as you'd expect from a CFO at one of these conferences -- but he did reveal some enlightening news in the process. I'm excited about Terrain and can't wait to hear what's up the company's sleeve for Concept 5.

Lots of retail stocks are cheap these days. The beaten-up names include Aeropostale (NYSE: ARO  ) , bebe stores (Nasdaq: BEBE  ) , and American Eagle Outfitters (NYSE: AEO  ) ; all seem good for bargain hunters now.

Then again, I've always had a soft spot for Urban Outfitters and its individualistic brands. (I'm a shareholder, too.) It's a smart, cutting-edge retailer that is keyed in to certain consumer trends, and if it has learned from its mistakes last year, that should give it additional competitive edge for the long haul. It could also make the stock a perfect fit in your portfolio.

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