How Inventory Management Is Fueling Urban Outfitters' Turnaround Efforts

For apparel retailers, efficient inventory management can be the difference between steady sales (at full inventory mark-up) and an overwhelming clearance section (with much smaller margins). It's truly a make-or-break operation for the industry and getting it right can set a company apart from competitors just as missteps with the same inventory can wreak havoc on its financials.

In this segment from the Industry Focus: Consumer Goods podcast, Vincent Shen and Sean O'Reilly look at how Urban Outfitters' (URBN -0.87%) inventory management push has restored some of its declining profitability and how the company uses its omnichannel strategy to aid in clearing products from store shelves.

A full transcript follows the video.

This podcast was recorded on May 16, 2016. 

Vincent Shen: Moving on to our first example, I wanted to talk about Urban Outfitters. Recently, I did a lot of research about Urban Outfitters for the Supernova Explorer One mission.

Sean O'Reilly: One of The Motley Fool's awesome newsletter services.

Shen: Exactly. I wanted to look at it for the apparel sector. And we'll get more broad into the bigger department stores like Nordstrom as well. Urban Outfitters operates three primary chains. They have their namesake, Urban Outfitters, Anthropologie, Free People. They also have some ancillary brands.

O'Reilly: Those two satellite brands, I guess, are the ones that are going gangbusters right now, if I recall right.

Shen: Yeah. For some years, they were the ones that were providing most of the growth. Things overall for the company have slowed down. They're in a recovery turnaround phase. But a big focus for the company, you'll hear multiple times in their different management calls, earnings calls, presentations that they do, they talk a lot about their weeks of inventory and managing that number.

I pulled a lot of my calculations from S&P Capital IQ. Urban Outfitters has an inventory turnover for fiscal year 2016 of 6.5 times. Its days in inventory is at about 56.2. If you compare that to competitors -- think Abercrombie & Fitch, American Eagle, Gap, Express -- Urban Outfitters seems to be running a little bit more efficiently. The average for some of those peers is about 4.9 times, or 80 days. It's taking them longer, and they're going through their inventory fewer times in a year. 

So as I mentioned, with the company, Urban Outfitters specifically, going through this turnaround phase, by managing their inventory better, basically, for them, it reduces the need for them to employ markdowns to sell their goods. And obviously, that has a very direct impact on their margins and profitability. The company has been trying to handle its inventory better by making some strides in the supply chain. For example, going to a single-SKU system across all of its channels. All of its products now, whether you see them in store or online, they're all identified by that same SKU number.

This is basically fostering the idea of the omnichannel strategy that you hear so many retailers employing now, the idea that you want to give a shopper or customer the ability to buy whatever it is that you're selling whenever and however they want. Whether they're in your store, at home on their computer, or in your store on the app, which is something that's becoming very common, where a shopper will go to Urban Outfitters and interact quite a bit due to these beacons that the stores employ. They'll ping your phone if you're a participant, and you have the Urban Outfitters shopping app, and it gives you special offers. A lot of people end up shopping online while they're in store. It's really blending all these different channels.

O'Reilly: I'm really curious, since we're talking about inventory management, what inventory days and how much stores are going to have an inventory in two decades. How many things is Urban Outfitters and Macy's and J.C. Penney and Wal-Mart, how many things are they going to have on the shelves? You hear all these retailers talking about their omnichannel strategy, and what it's going to entail is having a huge -- I hate to bring them up again, because we talk about them every time we talk about retail, but [Amazon.com]. You're going to have a huge Amazon-like distribution facility that'll filter out to the stores. They're not going to have every size and every color of shirts. They're just not, it's not worth it.

Shen: Another example more specific to the apparel sector, you look at a company like Zara, which is known as this fast fashion, very successful. Something they stress is that they keep inventory levels pretty slim. When they ship out a new collection, for example, to stores, they do so at a very limited basis. This not only allows them to manage inventory very well, but also add some exclusivity to the new products that come out. So there's a bit more elevated demand from shoppers, when they think, "I might not be able to get this next week, if the store is sold out and that's all they're going to have."

Moving on, still within apparel, but also some of the bigger stores, I wanted to talk about Kohl's, J.C. Penney, TJX Companies, Macy's, Nordstrom. Larger chains actually tended to have lower turnover and more inventory on hand. They average about 3.9 times and 104 days. 

O'Reilly: So these things are sitting on the shelves for three months?

Shen: Yeah. Basically it would take them about 104 days to sell through everything they have. It's very interesting that the bigger stores are actually a little less efficient, you could call it. But not that surprising.