Urban Outfitters' Comps Went One Way, Its Shares Went Another

In this MarketFoolery podcast segment, host Chris Hill and Motley Fool Funds' Bill Barker take a stab at explaining the peculiar stock leap that niche retailer Urban Outfitter (URBN -1.05%) enjoyed in the wake of its second-quarter report. When comps decline 5%, it takes a lot of optimism to send the stock up by double-digit percentages. And its overseas, wholesale, and online operation were much of the cause for that optimism. The question is, what can this company do to truly turn the tide? It has some innovative ideas.

A full transcript follows the video.

This video was recorded on Aug. 16, 2017.

Chris Hill: Let's move on to Urban Outfitters. Their second quarter profits and overall sales came in higher than expected. Their comps were down 5%. So the fact that, at one point, this morning, shares of Urban Outfitters were up 23% -- it settled down a little bit, now it's up about 17% -- that still seems amazingly high for a retailer that has comps that are going in the wrong direction.

Bill Barker: Right. The majority of the business is going in the wrong direction. That is, the existing U.S. stores. Now, that's a problem, and that problem has been reflected in the share price, which has gone down from around $50 to $16 going into today. That's not all just this year. This has been an ongoing story for a while. But, the bright side is, European stores are doing better. They have positive comps, in fact, reasonably strong positive comps. The wholesale business is doing better, and the direct-to-consumer online is doing better. So, a little bit of bright news out there. But they have a lot of stores and they've admitted they've basically taken Urban Outfitters and Anthropologie as far as they're going to go. They're not really growing in the U.S. There's a lot of room outside of the U.S. to grow. In fact, they're growing one store, are you familiar with the Bethesda, Maryland at all?

Hill: Yes.

Barker: My hometown.

Hill: [laughs] That's not your hometown. That's where you live now.

Barker: It's not my hometown, it's my children's hometown.

Hill: I'm familiar with Bethesda, yes.

Barker: You're familiar with the Barnes & Noble there?

Hill: No.

Barker: There is, if you can believe it, a Barnes & Noble there, although it's going out of business. So, there's a huge Barnes & Noble-sized Barnes & Noble, two or three floors. Anthropologie & Company is taking it over. Anthropologie is one of the brands for Urban Outfitters. They're going to have all the eclectic things that Urban Outfitters does under this one roof. Anthropologie, BHLDN, the furniture store, and some dining. So, that's like a mini department store. It's not that mini. It's a department store, but not with the breadth of a Target, by any means.

Hill: But it's going to be all Urban Outfitter-owned properties, so there will be an Urban Outfitters on one section, there will be an Anthropologie in another, that sort of thing? And pizza, because they bought that pizza restaurant?

Barker: Vetri, right. There's going to be clothing, accessories. Anthropologie is basically, I don't know if there's going to be an Urban Outfitters within it, but there's going to be the cafe, which is branded under Terrain rather than Vetri, because that's another thing you have to think about. But, this is one of the things they're trying. They've done it one or two other places. I guess this is something to try.

Hill: Here's something else they can try. And let me pull a quote from one analyst, and this, I think, zeroes in on a particular challenge for Urban Outfitters and goes toward something you had said about how, they've grown in the U.S. all they're going to grow. One analyst said, "Urban Outfitters' collections look like an art installation rather than saleable merchandise." Why don't they just try and focus on actually selling clothing? Why don't they actually do that, instead of creating the experience that they've created?

Barker: It's loud in there, too.

Hill: It's really loud.

Barker: Well, we're not the target audience, are we?

Hill: We're not. But, every apparel retailer that we've talked about in the now seven years that we've been doing this show, every single one of them has had at least a six-month stretch of time when they were doing really well. American Eagle, Abercrombie & Fitch, take your pick across the board. They've all had short periods of time where they were doing really well in terms of, we've got the merchandise that young people want to buy, and we're doing a good job of managing our inventory. Urban Outfitters seems completely uninterested in attempting that.

Barker: Yeah. Well, that would be too simple. Better to try to run some restaurants and slide some restaurants into your establishments. Or not, I think they're still trying to figure that out. Anthropologie has done pretty well over the years. It's actually now bigger by about 10% in terms of sales than Urban Outfitters. Free People, that's the third brand out there, and that's still growing. Urban Outfitters itself is contracting. I'm sure we've seen the best days for Urban Outfitters. But, it's a concept that they can take internationally. That's not really what they're focused on in terms of the size of the business, it's only about 10% of their sales, but that's the better opportunity than opening any more of these things in the U.S.