Urban Outfitters Positioned for Strong 2013


Recent results for Urban Outfitters confirm that the company has continued to connect with its core customer. Stable input costs this year and better inventory positions along with improved merchandising and concise global brand outlook will treat Urban well in 2013. Despite the positive momentum behind the company and the stock, the shares currently trade at approximately 20 times estimated 2013 earnings, which seems in line with expected 22% expected earnings per share growth.

Like many other retailers, Urban offered updated revenue results earlier in the year, so earnings were of little surprise. Fourth-quarter revenue rose 17% to $857 million, and all of the segments were clear winners this holiday season, with comparable retail segment net sales up 37% at Free People, 11% at Urban Outfitters, and 7% at Anthropologie.

Relative to other retailers that have already reported, these results are stellar. The gross profit margin contracted 650 basis points to 36.6%, helped by lower markdowns across all brands along with better initial merchandise margins and occupancy leverage but offset by delivery expense deleverage–a necessary evil with a growing direct-toconsumer business.

Direct to consumer posted 44% sales growth to $241 million, representing 28% of total sales, up from 23% last year. The selling, general, and administrative ratio fell 7 basis points, which is impressive in a quarter in which the operating margin rose more than 100%; we would’ve expected incentive payout to be higher and affect the ratio. Total inventories grew 13% to $282 million, but supported 49 new stores and robust growth in direct to consumer. If we had considered comp store inventories only, the number would have fallen a respectable 3%.

Like the platform so many other retailers have mentioned recently, Urban’s forward outlook includes an approach that is “omni-channel and global,” incorporating a common voice across online, brick and mortar, and wholesale.

Management teams are smart to get in tune with this theme, which allows for more thorough penetration of the brands to a wider range of consumers. Additionally, expansion in new product categories and adjacencies through both internal concepts and external relationships could provide significant tailwinds touching new audiences and new global markets (most recently this occurred with the distribution of Free People in Japan.)

All of these changes will occur methodically, in line with Urban’s traditional pragmatic corporate bent and store opening plan (37 locations expected in total during 2013). All of the moderate goals the company has set for its growth seem reasonable and achievable, and while this doesn’t necessarily mean Urban will grow aggressively in 2013, it sets the company on the trajectory for moderate long-term sustainable growth.


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