Urban Outfitters' Namesake Brand Hides Underlying Strengths

While its smaller, fast-growing assets continue their impressive rise, Urban Outfitters core business puts a hurt on the company. If the situation can stabilize, investors will be dressed for success.

Mar 14, 2014 at 3:52PM

Like so many teen-oriented retailers in recent periods, Urban Outfitters (NASDAQ:URBN) is having trouble keeping the market at ease. Though it earned a record fourth-quarter sales figure and advanced its profit 7%, the company saw a steep drop in store-level sales at its core namesake asset. For some time now, Urban Outfitters' core has suffered while its other brands, including Anthropologie and Free People, have flourished. Even with the latter two's great same-store sales and income growth, the main line of business continues to weigh on the minds of investors and analysts. Will things get better anytime soon for Urban Outfitters?

Report card
On the surface, the fourth quarter doesn't look too bad for the trendy retailer. Urban Outfitters hit a record $906 million sales figure, which represented a 6% gain over the prior year's quarter. Even systemwide same-store sales came out positive, up 1%. Free People, a premium brand for the company, continues its highly attractive rise with same-store sales up 20%. Anthropologie grew its store sales 10%, while Urban Outfitters' same-store sales declined 9%.

On the bottom line, the company earned $0.59 per share, a 7% gain.

Anthropologie, which sells anything from sundresses to scented candles, is quickly becoming Urban Outfitters' juggernaut asset, representing 41% of total sales and barely less than the much larger (by store count) Urban Outfitters. This trend couldn't happen fast enough for the company as repeated attempts at jump-starting sales at the namesake brand have been met with relatively cold reception. Management sees continued softness for Urban Outfitters in the current quarter.

Free People is still a minor part of the company, though its cash machine is incredibly important to the overall picture, as evidenced by management's move to open new locations at a brisk pace compared to the other assets. Throughout 2013, the company added 13 Free People stores to the prior 77.

What it needs
Clearly, Urban Outfitters has plenty of opportunity with both Anthropologie and Free People. The strategy of narrowly defined niche specialty retailing with higher market demographics gives the company some insulation from broader retail trends that are hurting the core Urban Outfitters.

Also showing promise is the wholesale segment, where sales grew 20% for the full-year 2013 (compared to top-line sales growth of 6% systemwide). Omni-channel retailing, while an overused buzzword, is absolutely necessary in today's shopping environment. Free People, while having fewer than 100 branded locations, sells wholesale to well more than 1,000 shops and department stores. The segment requires less capital to grow and only strengthens the brand and encourages people to seek out the branded stores.

At 15 times forward earnings and a trailing EV/EBITDA of 8.6 times, investors are getting a decent deal on the fast-moving assets and overpaying for Urban Outfitters. If and when the core brand stabilizes and returns to same-store sales growth, investors would then enjoy the fruits of the company's strong points. The business has a wonderfully pristine balance sheet with half a billion in cash and zero borrowed on its credit facility.

While specialty retail is a tough sell these days, Urban Outfitters may be one of the stronger picks in the litter.

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Michael Lewis has no position in any stocks mentioned. The Motley Fool recommends Urban Outfitters. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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