Should You Bet on Urban Outfitters' Turnaround?

Urban Outfitters has struggled due to severe weather conditions, but can it get itself back on track?

Apr 5, 2014 at 3:11PM

Apparel retailer Urban Outfitters (NASDAQ:URBN) has run into difficult times of late. The company's latest results failed to meet consensus estimates as severe winter weather, which hurt many other retailers as well, weighed on Urban's results. The namesake Urban Outfitters brand struggled, but the silver lining came from the strong performance of the Free People brand.

In addition, Urban Outfitters has been performing better than its apparel rivals Abercrombie & Fitch (NYSE:ANF) and Aeropostale (NYSE:ARO). Urban's strategies for the long run also look impressive and should help the company perform better as compared to competitors. Let's see why.

A cautious outlook
After facing a tough challenge in the fourth quarter because of severe weather conditions in the Midwest and Eastern United States, Urban Outfitters is looking at a turnaround. However, the namesake Urban Outfitters brand's underperformance was a major concern for the retailer in the fourth quarter as comp sales dropped 6%.

But, after a thorough market research, Urban will be restructuring this brand. It will reorganize the working of the brand and bring all creative functions to a more central role. In addition, the company will also focus on its core 18 to 28 year old age group and roll out merchandise accordingly.

It will take some time for these changes to reap results, and until then, there will be no relief for the Urban brand. According to management, "Current quarter sales at the Urban brand will remain well below those achieved in the first quarter last year, and margins will likely be under considerable pressure." It is difficult to predict the exact turnaround time. But the changes the company is going to make in the brand should help it deliver long-term gains.

Positives to note
On the bright side, Urban Outfitters' Free People brand turned in an outstanding performance in the quarter. The company is expanding its intimate apparel offerings to sustain its growth momentum as this category grew two times faster than the apparel category. Free People's shoe category was another big success, with retail sales increasing 54% from the year-ago period. The company received an enthusiastic response for its newly launched wholesale shoe line at Las Vegas, which will be in stores by August.

In addition, the Anthropologie brand has also been doing well. In spite of a highly promotional holiday season, Anthropologie's traffic remained strong without too much spending on promotions. Anthropologie delivered its best fourth-quarter operating margins last time, and the company intends to keep this strong performance intact.

Anthropologie's petite assortment is currently offered in seven stores and online, and it saw 303% sales growth in the previous quarter. Urban Outfitters plans to expand this assortment to a dozen additional Anthropologie stores by 2015. It has also integrated the BHLDN bridal concept into the Anthropologie brand, which reported increased sales of around 50%. 

Urban Outfitters' direct-to-consumer channel is also getting more efficient with each passing quarter. This is good news for investors since apparel sales are expected to be the leading driver of e-commerce growth going forward, according to eMarketer. Urban has been able to lower order fulfillment times by over 30% and shipping times by over 15%, so it's making the correct moves to tap more online customers.

Still a better pick
Urban Outfitters reported 6% growth in revenue in the previous quarter and same-store sales growth of 1%. These numbers don't look outstanding, but when compared to peers, Urban is way better. For instance, Aeropostale's same-store sales were down 15% in the previous quarter. In fact, for the full year, Aeropostale's sales were down 15%, much worse than the 2% drop in 2012. 

The problem with Aeropostale is that is isn't able to offer the right merchandise to its target audience, according to Fool contributor Chad Henage. Its online sales are also struggling, as seen by a 4.8% drop in the previous quarter.

Abercrombie's performance hasn't been noteworthy either. In the last quarter, Abercrombie's revenue in the U.S. dropped 13%, while same-store sales were down a massive 15%. Even Abercrombie hasn't been able to get its merchandise mix right, as Henage pointed out. Moreover, since Abercrombie positions itself as a high-end retailer, the company might not be able to get out of the soup anytime soon, as budget-conscious customers are likely to stay away because of high pricing. 

Bottom line
Despite challenges, Urban has been able to post positive growth numbers. The company might face short-term headwinds as it looks to bring its namesake brand back on track, but growth at Free People, Anthropologie, and in online sales make it a good long-term prospect.

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Shirish Mudholkar 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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