Urban Outfitters (URBN 4.51%) is a mall staple. Largely focused on selling fashion apparel for younger customers, it always has to be at the cutting edge of design. That can lead to the company's brands falling out of favor with customers at times. But there's an interesting new division at the company that suggests it is increasingly important to interact with customers in new ways, too. Aptly, the new division is named Nuuly, and you'll want to pay close attention to it if you invest in any retailer.
Urban Outfitters is a fashion-focused business
There are some retailers that sell basics, which tend to remain in fashion no matter what is going on in the world. Everyone needs simple jeans and T-shirts. But Urban Outfitters is largely focused on delivering fashion styles to customers, which is a bit more difficult. Miss a trend, and your store could find itself devoid of customers. That's actually a problem right now for Urban Outfitters' namesake brand.
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Fiscal third-quarter 2024 sales for the Urban Outfitters nameplate were down 14%. Luckily, the company's Anthropologie and Free People brands grew sales by 13% and 23%, respectively. Overall, the company's retail business saw 7% sales growth. While not a bad quarter by any stretch of the imagination, the weakness at Urban Outfitters highlights the impact that shifting consumer tastes can have on an apparel retailer.
But there's another division at Urban Outfitters that is drawing increasing attention from investors. Called Nuuly, it doesn't sell clothing. It rents clothing. While that might not sound like a desirable thing to some, the results this business has put up suggest that it is exactly what a lot of consumers want.
Nuuly is growing at an incredible pace
To be fair, Nuuly is a relatively tiny operation. To put some numbers on that, the Urban Outfitters brand had fiscal third-quarter sales of $307 million, second only to the Anthropologie brand's roughly $535 million. Nuuly's sales in the quarter were a touch under $66 million. So this business is working off of a small base.
That niggle aside, the company managed to increase Nuuly's sales by a whopping 86% year over year. This was driven by a 68% increase in the number of subscribers using the Nuuly service. This is notable for two reasons.
First, Nuuly is clearly resonating with customers, and it offers Urban Outfitters a way to generate revenue that it might not otherwise see. Second, subscriptions provide a more consistent revenue stream than one-off sales. It's an entirely different business model that appears to be a perfect match for customers who are perhaps being overlooked by retailers today.
Nuuly has an interesting structure. For roughly $100, customers can pick six items to rent for a month. Nuuly takes care of cleaning, and postage is baked into the subscription price. If a customer falls in love with an item, they can buy it. Basically, it is a relatively inexpensive way for consumers to keep their wardrobe fresh, given that buying new clothing could easily cost $100 for a single item.
Clearly, Nuuly is still a small business. However, it is already just about the same size as the company's wholesale segment, so it has quickly become an important part of the overall company. Management was very excited about the prospects for this fast-growing division during the company's earnings conference call, which early results suggest is appropriate.
Is Nuuly the future for Urban Outfitters?
While Nuuly is growing quickly, it only achieved its first quarterly profit in the fiscal third quarter. So, it is probably too soon to get overly excited. It also seems likely that more consumers will want to buy clothing than rent clothing over the long term. But given the rapid growth in Nuuly's business, it could be an increasingly important story for Urban Outfitters -- and even the entire retail sector. If you own Urban Outfitters or any of the company's peers, you'll want to keep a close eye on this fast-growing business segment in the quarters ahead.
