This Company's Returns Are the Worst

Urban Outfitters (NASDAQ: URBN  ) targets a tricky demographic: the trendy 20-something. By and large, the company has succeeded at making a profit off fickle tastes, and this past quarter was no exception. Revenue surged 17% for the kitschy clothing store, 10 new stores opened, and non-comparable-store sales jumped 44%. While this should have been cause for celebration, one critical detail still has both executives and investors scratching their heads.

Same-store sales slump
As CFO Francis Conforti explained in a March 11 conference call, Urban Outfitters' total comparable-store sales flat-lined because a 2% decrease in the unit selling price cancelled out a 2% increase in transactions. Somehow, the company’s financial progress is being shortchanged.

Conforti gave a corporate-speak explanation for the peculiar trend, stating, "if it were not for direct-to-consumer returns at stores ... our store sales comp would have been low single-digit positive." Translation? So many people are returning their purchases that the company's same-store sales metric is starting to suffer.

Comparing Urban to T.J. Maxx makes hipsters cringe
So what’s behind the widespread returns? Is Urban’s return policy somehow more liberal than that of other clothing stores?

Nope.

For example, the company’s return policy is exactly the same as almighty online retailer Amazon.com  (NASDAQ: AMZN  ) and TJX  (NYSE: TJX  ) , the business behind discount clothier T.J. Maxx. Returns for all three companies are only possible within 30 days of purchase, and only if the item of clothing is unworn. Granted, as an online retailer Amazon doesn't have to worry about same-store sales, but T.J. Maxx reported that the metric had risen 1% within the last quarter. Why is Urban Outfitters affected with a return issue if, on paper, its policy is the same as its peers'?

Ironic T-shirts aren't timeless
The reason for the returns may be at the heart of the Urban Outfitters aesthetic. The company has made a name for itself by selling quirky, offbeat statement pieces. These clothes may seem alluring when customers are in the store with indie dance music pumping into their heads. When that neon maxi dress or studded pair of boots gets home, however, the harsh light of reality sets in, and so does buyer’s remorse.

If Urban wants to shirk the strife of widespread customer returns, it has a couple of possible options. First, it could go the way of Target (NYSE: TGT  ) and offer a variety of lower-priced, basic clothing pieces along with statement, designer offerings. For its primary demographic, however, this could be the retailer equivalent of Maker's Mark watering down its booze, and could lead to a similar outrage.

A second option is to place more emphasis on non-clothing products the company already sells, like books, furniture, and novelty items. These types of items are less likely to be returned than an expensive statement dress that doesn't fit right, and could boost Urban's already healthy overall revenue.

Fashionably Foolish
By many counts, Urban Outfitters has been performing very well lately. To fix a problematic metric, it may need to diversify its inventory slightly, but other than that, its financials are particularly impressive considering the volatility of its audience. We'll see how long Urban can make vintage, "yard-sale-style" clothes fashionable, but for the time being, they’re not going anywhere anytime soon.

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