Urban Outfitters (NASDAQ:URBN) shocked the market this week when the company announced it would acquire a pizza chain. Shares fell as much as 20% in the two sessions following the release, though the stock had regained most of its losses by Wednesday's close.
Management said it would take over the Philadelphia-based Vetri Family group of restaurants, which includes Pizzeria Vetri, named by Food & Wine as the nation's best pizza restaurant. Though terms of the deal were undisclosed, $50 to $100 million would be a reasonable estimate for a company with seven restaurants under its umbrella.
The acquisition, in combination with a lackluster report, shaved as much as $600 million off the company's market cap, so the price tag is not what the market is concerned about. Rather, the strategy behind the move seems to have left investors scratching their heads.
CEO Richard Hayne explained the decision, "Spending on casual dining is expanding rapidly, and thus, we believe there is tremendous opportunity to expand the Pizzeria Vetri concept." While plenty of commentators were quick to mock the idea of a mash-up between a pizzeria and a clothing store, Hayne said that the restaurant would be integrated as a standalone component with Urban Outfitters' brands, complementing its lifestyle image. Embodying the concept, a project known as Space 2420 just opened last week in Austin across from the University of Texas campus and will include an expanded Urban Outfitters, three food and beverage concepts including Pizzeria Vetri, and a performance space that will host live music acts.
Becoming a lifestyle brand
As comparable sales growth has slowed at Urban Outfitters and its sister stores (Anthropologie and Free People), the company has increasingly focused on its positioning as a lifestyle brand. The Vetri acquisition is not the first time it has made such a move. In 2008, it acquired a garden center that it converted into Terrain, its own upscale home and garden center. Though it only has two Terrain locations to date, the brand will be the centerpiece of a project similar to Space 2420 set to open in suburban Philly in 2017, and more openings are likely to come. In 2011, it launched BHLDN, a bridal store, which has grown to eight locations since then. The Vetri acquisition seems to be a continuation of this strategy -- and a restaurant concept makes more sense than it might seem on the surface.
Hayne is correct in his conclusion that Americans, especially millennials, are more interested in spending money on experiences rather than things. As the latest round of earnings reports have shown, apparel retailers are struggling even as Americans have more discretionary income than at any point since the recession. Meanhwile, restaurant sales are flying higher, and food service has the added benefit of being invulnerable to e-commerce.
It's actually not that crazy
Plenty of general retailers have added food service to their stores in one form or another. In 2002, Target agreed to include a Starbucks in most new stores, and there are now over 1,000 locations for this partnership. The cafes attract shoppers who might not have otherwise visited Target and encourage customers to spend a few extra bucks while they're there. Starbucks has a similar arrangement with other retailers, including Barnes & Noble.
Costco Wholesale offers cheap eats to its customers upon checking out, a business that contributes several billion dollars in sales each year, and privately held IKEA does the same thing. And malls, that staple of brick-and-mortar retail, are essentially built on the premise of a food court complementing retail shopping.
It may be a gamble for Urban Outfitters to integrate a pizza chain into its business, but it's a smart one. The results of Space 2420, which seems to epitomize the kind of experience Urban wants to give its customers, should shed some light on the company's prospects as an integrated lifestyle brand.
Even without the pizzeria acquisition, the stock is stronger than its recent dive would indicate. The company continues to aggressively buy back shares, and its strong balance sheet should help push through any short-term headwinds. After the recent sell-off, shares look like a bargain at a price-to-earnings of just 13 times.
Jeremy Bowman has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Costco Wholesale and Starbucks. The Motley Fool owns shares of Barnes & Noble. The Motley Fool recommends Urban Outfitters. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.