Every once in a while, we here at the Fool take a look at companies' comments at analyst presentations to get some extra insight into what's going on at those companies. I took a peek at Urban Outfitters'
Navigating shifting fashion
It's probably no secret to anybody that Urban Outfitters had a tough 2006, as the fashion world made a major shift. You could call it a "fashion miss," although the argument has been made that Urban Outfitters simply carried the new, '80s-inspired look of big tops and skinny bottoms too soon. However, it appears the new "silhouette" isn't quite making it across the board: The company revealed that its Anthropologie unit is still grappling with the new look. After all, Anthropologie's target customers are in their 30s, so they remember the '80s, and they're a little less excited to wear a look they already wore once, in high school or college.
Urban Outfitters said it's still tweaking its merchandise selection at Anthropologie, with the goal of only having 20% to 25% of that brand's clothing reflecting the new look. Therefore, the beginning of Anthropologie's spring season might still be a challenge as it adjusts to provide merchandise that's more palatable to 30-something women.
On the other hand, CFO John Kyees pointed out that the Urban Outfitters brand's core customer was only four or five years old about 15 years ago, the last time "big-over-little" fashion was in, and therefore doesn't remember it. Thus, younger women are more open to the switch, and the company wants 50% of the fashion mix at the Urban Outfitters unit to reflect that.
Easy does it
Given the continued strength of Urban Outfitters' brands, as well as the fact that the company is still opening new stores, it doesn't seem difficult to imagine that 2007 will be a much better year. (Not to mention that shoppers should be growing more and more accustomed to the new fashion looks, not only in major metropolitan areas on both coasts but also in between, where adoption has been slower.)
Urban Outfitters is aiming for 20% top-line growth, as well as 20% operating margins. (Operating margin was only 14% over the last 12 months.) It's easy to see that the last year has been a bit of an anomaly; over the last five years, Urban Outfitters delivered compound annual growth rates of 30% in sales, 33% in gross profit, and 56% in net income.
Kyees also spoke about the strength of the balance sheet. Although Urban Outfitters' cash reserve will be slightly lower at the end of the current year, at between $200 million and $220 million, the expectation is that next year it will grow its cash reserve by $100 million to $125 million, and that's including the expense of opening 40 new stores.
Ring in the new
In both presentations, there was talk of the mysterious "Concept Four." Urban Outfitters is quiet about what exactly the new concept will entail, other than the fact that it will speak to the demographic base it already addresses, which sounds good to me. I'd hate to see it try to diverge from its expertise and address a different type of shopper.
Furthermore, Urban Outfitters' founder and CEO, Richard Hayne, is apparently very involved in conceptualizing Concept Four with existing team members, and that sounds good to me as well, since he is the one who had the creative vision to create Urban Outfitters back in 1970.
According to the presentations, Concept Four may be announced this year. Not surprisingly, the new concept may require additional capital expenditures, so we'll all stay tuned for developments.
Another interesting element is what Urban Outfitters' customer loyalty program at Anthropologie might include. It was tempting to compare it to the loyalty program at Chico's
As it turns out, there may be a different tactic for Anthropologie customers. Kyees said it may entail something like free gift wrapping or early notification of fashion, or even certain items that are only available to the Anthropologie customers who are part of the program.
Kyees pointed out that the Anthropologie customer "is very well-educated and very savvy, and she wants unique products. She would never buy from Gap
Although most women do love a good deal, I can see how discounting might simply cheapen the Anthropologie brand and cause it to lose some luster and integrity. It should be interesting to see how this loyalty program, when its exact strategy is solidified, does with Anthropologie shoppers.
Getting the word out
Unlike some retailers, Urban Outfitters doesn't spend money on TV advertising campaigns. However, that doesn't mean it has no means of getting noticed beyond word-of-mouth buzz.
Urban Outfitters has been talking about its online initiatives lately; email blasts can help fuel interest in the concepts as well as drive traffic to both retail stores and the brands' websites.
Kyees said email initiatives have been successful, although the question seems to be whether they actually drive customers into stores or simply drive online sales. In his presentation, Hayne pointed out that direct-to-consumer sales are growing quicker than bricks-and-mortar revenues, which definitely shows the strength of the strategy. Meanwhile, Hayne also emphasized the idea that email can be very helpful in Europe, where the company is just starting to open bricks-and-mortar stores. The Urban Outfitters' concept's direct sales in Europe have been twice what the company expected so far.
The year ahead
I can't say I'm too surprised that Anthropologie has had a hard time getting older women to respond to the new fashion silhouette; although I still think the concept's clothes are pretty awesome, I have sometimes wondered just how many women my age would be willing to go "big-over-little" again. On a more positive note, it sounds like the company is paying attention to what its customers seem to be communicating and adjusting selection to reflect it.
Then again, the presentations gave the impression that Urban Outfitters is still very cognizant of how to serve the customer and keep its brands intact. Given what its loyalty program apparently will not be, it also doesn't sound like the company's running scared to keep its customers coming back. And last but certainly not least, I can hardly wait to find out what Concept Four is going to be all about. It should be an interesting year for Urban Outfitters.
Flash back to earlier communications about Urban Outfitters from the Foolish archive:
- Check into Urban Outfitters' holiday sales.
- Revisit Urban Outfitters' third quarter.
- And here's the skinny on the quarter before that.