Urban Outfitters’ Growth Continues While Others Stall

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Solid second-quarter results from Urban Outfitters (NASDAQ: URBN  ) came as a welcome relief recently. Other apparel retailers have witnessed weakness in comparable store sales growth with no visible signs of a turnaround, which makes Urban's terrific performance in the previous quarter stand out even more.

Urban Outfitters reported an impressive 9% uptick in same-store sales in the second quarter. In addition, revenue increased 12% as compared to the same quarter a year ago and net income saw an impressive 25% uptick. When compared to Aeropostale (NASDAQOTH: AROPQ  ) and American Eagle Outfitters (NYSE: AEO  ) , this was indeed impressive and the difference in their performance is reflected in their stock prices this year.

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A shift in spending preferences among teens toward electronics items as compared to logo-centric apparel has hurt apparel retailers. Teens are now attracted more to fashion outlets like H&M, Zara and Forever 21, and of course, Urban Outfitters.

This has been one of the drivers behind the good performance of Urban Outfitters. In addition, promoting sales through different channels -- including e-commerce -- was another driver behind the solid performance of the company.

Growth ahead
Urban Outfitters plans to add 35 to 40 new stores during the current year. It has also been experimenting with the idea of setting up branded shops at Nordstrom stores and since this has proved to be successful so far, Urban Outfitters has opened another nine stores in the current year inside Nordstrom's locations.  According to management, these shops carry a wider product range, as a result of which they have delivered better productivity. This is the reason why Urban has decided to open more such stores at Nordstrom locations going forward. 

The direct to consumer channel (DTC), through which Urban markets and sells its goods directly to customers by way of e-commerce,  increased 16% in the previous quarter. An increase in direct to consumer traffic was accompanied by an increase of 51 basis points in visitor conversion rates, which indicates that the e-commerce channel is helping Urban gain more customers.  Direct orders grew 40% in the previous quarter, further indicating that the DTC channel is doing well.   The company is also focusing on strengthening this channel in order to increase business. The company now ships to more than 120 countries from its warehouses in the US and the UK and so it has quite a big addressable market at its disposal . 

Aeropostale has been the worst performer of the lot this year with the stock price having tanked almost 33%. The company generated second-quarter revenue of $454 million. This was 6.4% lower than the same quarter in the previous year. Comparable sales, including the e-commerce channel, fell 15 %. 

Aeropostale reported a net loss of $33.7 million. This worked out to a loss of $0.43 per share. The company is struggling to attract teens to its stores and its merchandise hasn't been received well. A 10% decrease in traffic, a 5% drop in pricing and a 1% drop in products per transaction are all negative signs. There are no signs of any turnaround going into the holiday season either due to tough competition from other players .

For instance, customers looking for bargains and discounts would look at cheaper options such as Hennes & Mauritz and Forever 21. In addition, downbeat outlooks from American Eagle Outfitters and Abercrombie & Fitch further suggest that the industry is not in the best of health. 

American Eagle reported quarterly results on Aug. 21. The company issued a weak profit outlook on the back of uncertainty over teen apparel demand, high teenage unemployment , and shifts in purchasing patterns away from logo-centric apparel into electronic items . In the second quarter, it reported a revenue decline of 3% from the year-ago quarter.

American Eagle also reported that same store sales fell 7% in the second quarter after a 5% decline in the preceding one. Going forward, it expects same-store sales to fall further in the range of mid to high-single digits and there are no signs of a recovery in sight .

Management said on the earnings call that the company is facing a highly promotional and competitive retail landscape and these trends have carried forward into the third quarter. In addition, weak product execution in the women's category also hurt sales. So it is not surprising that analysts expect American Eagle's earnings to decline a whopping 37.4% this year and investors would be better off staying away from it.   

Urban Outfitters has performed better than its peers and the company's expansion plans also look good. While others are suffering from declining traffic and sales, Urban Outfitters is focused on growing its business further and this makes it the pick of the lot.

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5/27/2016 4:01 PM
AEO $15.65 Up +0.23 +1.49%
American Eagle Out… CAPS Rating: ***
AROPQ $0.04 Down +0.00 -8.00%
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URBN $28.92 Up +0.29 +1.01%
Urban Outfitters CAPS Rating: ****