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Urban Outfitters's Results Driven by Anthropologie and Free People

Brian Shaw
November 23, 2013

Urban Outfitters (NASDAQ: URBN) reported record results during the third quarter driven by retail segment same store sales (SSS) growth of 30% at the company's Free People stores and 13% at Anthropologie. While this sounds like a recipe for success, there is more to the story; almost half of the company's sales are derived from its namesake Urban Outfitters stores; the Urban Outfitters brand reported a same store sales decline of 1%. While a 1% decline is never a good thing, it is far better than Abercrombie & Fitch's (NYSE: ANF) 14% overall same store sales decline this quarter and is also in line with Gap's (NYSE: GPS) primary brands Gap, Banana Republic, and Old Navy, which reported SSS of 1%, -1%, and 0% respectively. To assess how these results translate to an investment thesis for Urban Outfitters, it is important to look at the company in a couple of different ways.

Anthropologie and Free People reported tremendous results
In light of the relative difficulty that many clothing retailers are experiencing, the strong growth at Anthropologie and Free People is quite impressive. In total, revenue at Anthropologie grew 16% during the quarter and revenue for the Free People brand (both retail and wholesale) grew 29%.

Top line growth was also supplemented margin improvements thanks to fewer markdowns and improved initial margins at both Anthropologie and Free People. Clearly, Urban Outfitters' management responsible for these two brands has a strong ability to pick products that resonate with customers and provide resiliency in the current highly promotional retail environment.

Urban Outfitters' results are on par with industry

On the third quarter earnings call, Urban Outfitters group CEO Ted Marlow said "In a word, we came up short" while describing the results of the company's namesake brand. The frankness of this disappointment and the company's clear understanding of what led to results falling below internal expectations was a refreshingly honest tone compared to other companies' earnings calls. 

While Urban Outfitters' growth may have been below its own expectations, the brand produced comparable results to a sample of peers as noted below:

Brand Q3 SSS Growth
Urban Outfitters -1%
Old Navy 0%
Gap 1%
Abercrombie & Fitch -13%
Hollister -16%

Source: Q3 earnings releases

Based on this comparison, one could argue that Urban Outfitters is keeping pace with its competition while allowing the company's other brands to drive industry-beating growth.

Huge opportunity to open more Urban Outfitters, Anthropologie, and Free People stores
For investors looking for long term market out-performance, there is more to the investment thesis than the latest quarterly results. It is true that the Urban Outfitters brand is treading water while Anthropologie and Free People grew tremendously; what is more important is how much each of these brands can grow going forward. 

To assess the opportunity, here's a comparison of a collection of worldwide store counts between certain brands owned by Urban Outfitters and Gap:

Brand Total Stores
Urban Outfitters 225
Anthropologie 185
Free People 86*
Gap 1,392
Old Navy 1,021
Banana Republic 650
Athleta 61

Source: Q3 earnings releases
* Free People also sells on a wholesale basis to 1,400 retail locations

The takeaway from this comparison should jump out of the table above; there are over six times the number of Gap locations as there are Urban Outfitters, and over three times the number of Banana Republic locations as there are Anthropologie stores. This is significant when trying to assess the total growth opportunity, since each of Urban Outfitters' brands has significant room for expansion. 

In contrast, Gap's rapid roll out of its Athleta apparel stores is a perfect example of Peter Lynch's advice in One Up on Wall Street to "investigate whether the product that's supposed to enrich the company is a major part of the company's business." Athleta shows every sign of being a high-growth concept, but the sheer size of Gap's other brands make it difficult for Athleta to ever materially drive the company's overall growth.

In addition to Urban Outfitters' established brands, the company's small size provides the opportunity for new