Urban Outfitters Needs to Do 1 of These 2 Things

Despite being definitively more current than its teen apparel rivals, Urban Outfitters (NASDAQ: URBN  ) is experiencing the pains of catering to a fickle demographic. The company limped into this earnings season on the back of a pretty rough fourth-quarter report that included a same-store sales decline of 9% at its core brand. Though it is certainly buoyed by its growing satellite brands, Urban Outfitters needs to show investors it can come back in style with the teens that gave the company its meteoric rise.

Ball and chain
If it wasn't for the namesake brand that accounts for nearly half of the company's sales, Urban Outfitters would be a top-notch retailer. Free People and Anthropologie are both growing at impressive double-digit rates, but cannot shine out from under the dirt of the chief line. So, how does Urban Outfitters turn its ball and chain into a balloon?

A recent article in The Wall Street Journal cited a Stifel Nicolas analyst's opinion that Urban Outfitters should move up in the demographic chain to an older, more reliable customer base -- college students. The move would make sense given that Urban Outfitters is well positioned, geographically, to capitalize on campus-dwellers, but are they a more valuable customer?

Investors need to keep in mind that Urban Outfitters' troubles (along with those of teen retailers across the board) are sourced from fast-fashion companies that have tight inventory skills and can bring to market products that are extremely topical and affordable. These companies have an advantage in that today's trend is tomorrow's junk, and they can deliver accordingly. Teens are acutely tuned into what's cool and what's not, and the tides can change overnight. They're also lured by affordable prices, which Urban Outfitters is far from.

An H&M billboard in Los Angeles showed a bikini top for $4.95. A similar product at Urban Outfitters can easily exceed $50. Sure, Urban Outfitters is a higher-quality product, but it's hard to argue with a bargain -- especially when the purse strings are tight.

One to watch
Beyond same-store sales figures and the usual suspects, investors need to listen to management's language. Urban Outfitters needs to revamp its core brand -- either come down in price or trend with those who are willing to pay up. College students, however, may not be high up enough on the socioeconomic totem pole. Remember, these are people who eat at Taco Bell and are burdened with debt to begin with.

By most accounts, Anthropologie will keep growing nicely, and Free People even more so. The latter appeals to a more sophisticated client base, and despite the high prices, the clothes sell themselves. Investors are paying full value for these two at today's stock price. If Urban Outfitters can turn around its namesake, though, there is plenty of opportunity at these levels.

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Michael Lewis

Michael is a value-oriented investment analyst with a specific interest in retail and media businesses. Before coming to the Fool, Michael worked with private investment funds focusing on deep value and special situations. Currently living in the media capital of the world--Los Angeles, California.

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9/3/2015 11:14 AM
URBN $31.39 Up +0.60 +1.95%
Urban Outfitters CAPS Rating: ****