Hipster Retailer Turns Restaurateur

Urban Outfitters (NASDAQ: URBN  ) , the Philadelphia-based eclectic retailer, is moving into the bar and restaurant biz to get customers to linger at its stores. Is mixing apparel, aperitifs, and appetizers a good idea?

Food as entertainment value
The company has applied for a liquor and restaurant license for the location it's building in hipster mecca, Williamsburg, a neighborhood in New York. Despite some grousing from the likes of local councilman Stephen Levin, who said, "Do we really want people drunk when they are buying their skinny jeans and ironic t-shirts?" it's an idea that will attract Urban Outfitters' demographic.

According to a Boston Consulting Group survey, millennials, Urban Outfitters' main demographic, spend more on restaurants than any other spending category, dining out more than three times weekly. They also spend more on apparel than non-millennials.

The company's Terrain home and garden stores already have full-service restaurants and bars featuring meals like truffle polenta pizza. Wendy McDevitt, president of Terrain, told Bloomberg that customers often double their shopping time at the stores when they eat at the cafes: "The one thing you can't get in the cyber world is the tactile experience and that won't go away. Food is becoming bigger and bigger in terms of entertainment value."

Urban Outfitters' other stores, Free People, Anthropologie, and BHOLDN, are already destination retailers in that merchandise is unique and refreshed frequently.

This in-store-eats trend is nothing new. Wal-Mart and Target both have fast food available in-store. Other retailers that employ the in-store-eats model are Gap, Macy's, Ikea, and Cabela's (NYSE: CAB  ) .

Two retailers' demographics couldn't be more dissimilar than Cabela's, the outdoors outfitter, and Urban Outfitters--their customers' only common denominator is a love of flannel. But make no mistake -- Cabela's is a destination retailer, as I detailed last year. Its in-store restaurants, however, feature game specialties like elkburger, and not lamb marquez like Terrain.

However, there is risk to in-store eateries. One bad meal or Yelp! review could keep a current or prospective customer away. As Doug Wood, president of Tommy Bahama, which is owned by Oxford Industries (NYSE: OXM  ) , told Bloomberg, "You have the opportunity to lose a guest with every single meal and they'll look at that meal as an extension of every product you sell, so to fail is to fail big."

But that's a risk Urban Outfitters, Cabela's, and Oxford Industries' Tommy Bahama are willing to take. Last December, Tommy Bahama opened its flagship store in Manhattan with a 6,700 sq. ft. restaurant and 1,300 sq. ft. freestanding bar with only 5,000 sq. ft. devoted to actual apparel. On the second-quarter earnings call, CEO Terry Pillow noted the flagship was the company's No. 1 performing store in July.

More fundamentals, please
Cabela's has had an amazing return of 365% in the last four years thanks to initiatives like strengthening e-commerce and omni-channel, much like Urban Outfitters. Both companies' management teams know their customers to a T, an ironic T in Urban Outfitters' case. Both have their own branded merchandise with 30% of sales internally for Cabela's adding up to $1 billion in sales last year.

Cabela's is generating $300 million in cash flow from operations, which, even as it plans to finance $100 million per year for the next two years to open 100 million square feet in stores, should leave the company in good shape, as CFO Ralph Castner told analysts on Sept. 19.

Urban Outfitters has its own strengths as an e-tailer with websites devoted to its five brands, and these sites are exemplars of what a retail website should be. E-commerce covers over 120 countries and was responsible for most of the huge earnings beat in August, with a 40% surge in direct-to-consumer sales.

Totaling 500 stores, Urban is 10 times larger than Cabela's with its 40-some stores in the US and Canada.Urban Outfitters is opening more stores (35-45 per year) and is expanding overseas, first in the UK and Japan. The company will also be opening five Urban Outfitters, two Free People in Japan, and one Anthropologie store in Europe.

There should be no problems financing these expansions, as Urban Outfitters exited the second quarter with $741 million in cash and cash equivalents, and the company has no debt.

Two of Oxford Industries' four main brands have been outperforming; Tommy Bahama and Lilly Pulitzer posted second-quarter sales comps of 13% and 19%, respectively. However, men's apparel brand Ben Sherman and Lanier Clothes, licensor of menswear brands, both reported year-over-year sales declines.

A great idea
Urban Outfitters clearly has its finger on the pulse of its customers, and adding eateries to more stores will create an even more compelling retail destination.

Cabela's continues to be a solid performer that is making all the right moves. As for Oxford Industries, given that the company guided lower for the back half, this is a less promising buy than Cabela's or Urban Outfitters.

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