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A Few Reasons Why This Apparel Retailer Is a Long-Term Pick

July 25, 2014 | About:
jaggom

jaggom

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Urban Outfitters (URBN) unveiled impressive results in the recent quarter despite the slowdown in the apparel retail industry due to a sluggish jobs scenario and economy. But Urban Outfitters has outstripped its peers like American Eagle Outfitters and Abercrombie & Fitch who have continued with their run of dismal results.

Solid Performance

Urban Outfitters posted healthy performance across various brands such as Anthropologie and Free People. Also, it continues to deliver strong performance in direct-to-consumer, backed by the rise in consolidated comps. In addition, Urban Outfitters opened nine new stores during the quarter. This helped the company to post $774 million in sales, an increase of 12% versus the comparable quarter a year ago.

Also, its gross profit expanded 11 basis points to 37.7% due to the reduction in merchandise markdowns and improved initial merchandise margins at the Anthropologie and Free People brands, but it was partly offset by an increase in merchandise markdowns at the Urban Outfitters brand in North America.

As a result, its gross profit surged 12% and net profit climbed 17.5% to $70 million, or earnings of $0.47 per share.

Growth Avenues

Urban Outfitters largely benefited from its omni-channel platform that was launched in the third quarter last year. It continues to receive positive response from consumers as the company keeps adding new products and categories. Its innovative products and categories have indeed pushed its direct-to-consumer initiatives that in turn have supported the growth plans of the company. As a result, DTC grew tremendously on the back of an improved conversion rate, a higher average order value, and an increase in the footfall of consumers and customers during the quarter.

Also, Urban Outfitters remains confident about sustaining its growth momentum going forward, which is mainly driven by new store openings, growth in DTC sales, and growing wholesale operations globally. As per details in the regulatory filings of the company, retail segment comps were up in the mid-single digits so far in the fourth quarter, and this indeed is good news for Urban Outfitters amid a challenging holiday season.

Better Than Peers

In stark contrast, American Eagle’s comps have been declining, and for the fourth quarter, management has projected a mid-single-digits decline. The comps for the third quarter saw a decline of 5%, and this was after a 7% decline in the second quarter. The decline in comps would have been higher, but the AEO Direct channel registered an increase of 17% and thus arrested further declines.

This significant 17% growth in the direct channel reflects that the company is consistently making various initiatives in the omni-channel platform. This will certainly improve its online shopping experience in the future. Also, it was a surprise to notice that its newly launched mobile app delivered striking revenue growth in the quarter, more than double last year’s quarter.

As it looks ahead, American Eagle is counting on its strategic investment in its omni-channel initiatives, including e-commerce. Also, the company has experienced a fairly significant shift to online shopping as it delivered record e-commerce sales, which were 45% higher than the previous year’s same quarter.

In addition, American Eagle is betting on international expansion, company-owned as well as licensed stores, and closing down various under-performing stores. It plans to open at least 100 licensed stores in more than 20 countries, with Japan being the strongest license market in the second half of fiscal 2014. Nevertheless, these international expansions, aren’t something that would happen soon, so the positive impact would take time to reflect on the financial performance.

On the other side, Abercrombie is also practicing various moves in order to wriggle out of a tight corner that it finds itself in. The company would now be selling XL- and XXL-sized clothes for women. As a result of this decision alone, Abercrombie would be addressing a larger market and can hope to see some improvement in sales, which declined 11.7% to $1.03 billion in the third-quarter.

However, shareholders can certainly count on Abercrombie as it witnessed strong growth in its DTC business despite the challenging retail environment for teen apparel, which was up across all regions in the third quarter, with Asia being the star performer. In addition, the company’s international expansion plans are also shaping up well. In China, comps were up around 40% till the third quarter.

Conclusion

Urban Outfitters has been the best performer among its peers. The company is more reliable as far as comps growth is concerned as its peers have seen sharp declines in sales. While American Eagle and Abercrombie are aiming for a turnaround, Urban Outfitters is looking to carry its momentum forward by strengthening its sales. Hence, investors looking for a good buy in the apparel retail industry should definitely consider Urban Outfitters for their portfolio.


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