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Urban Outfitters Efforts Likely to Improve Comps Performance

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Urban Outfitters, Inc.’s (URBN - Free Report) turnaround efforts are expected to yield results. The company is benefiting from expanding wholesale operations, technology advancements and merchandising improvements. It is focused on making consistent investments in direct-to-consumer business, enhancing productivity in existing channels, adding new brands and optimizing inventory level.

Moving on, the company is seeing favorable response to its early fall apparel assortments. It had stated earlier that “comp sales” have been positive across all three brands so far in the third quarter. Additionally, women's business in North America and particularly in Europe is performing well.

Efforts Undertaken

Urban Outfitters, which shares space with Guess (GES - Free Report) and Zumiez (ZUMZ - Free Report) , introduced a subscription rental service for women’s clothes called Nuuly. The company expects to add nearly 50,000 subscribers within a year of operation. The subscribers will receive a six-item box worth $88 each month. Shoppers can choose from Anthropologie, Free People and Urban Outfitters brands, third-party brand and designer labels as well as rare vintage items for rent via a custom-built, digital platform.

Moreover, the company’s acquisition of Philadelphia’s The Vetri Family group of restaurants, including the Pizzeria Vetri chain, is in sync with its strategy to target and attract millennials to the stores. Further, Anthropologie and Nordstrom (JWN - Free Report) entered into a partnership to enhance reach. Per the terms, more than 200 items from Anthropologie Home are now available at selected Nordstrom full-line stores and on Nordstrom.com.

Moreover, Urban Outfitters is progressing well with its plans to expand base. In this regard, the company has opened 18 retail locations — four Anthropologie Group stores, five Urban Outfitters stores, six Free People stores as well as three Food and Beverage restaurants in fiscal 2019. The company now intends to open 24 stores in fiscal 2020.

Headwinds

The company is witnessing dismal margins of late owing to higher markdowns in a bid to combat soft demand. Gross margin shrunk 304 basis points (bps) to approximately 32.8%, mainly due to increased markdowns and deleverage in delivery and logistics expenses as well as store occupancy in second-quarter fiscal 2020. Going ahead, management expects gross margin to contract roughly 200 bps in the fiscal third quarter. This can be attributed to higher markdown rates, deleverage in delivery and logistics expenses as well as the launch of Nuuly. Having said that, some experts believe that the metric will recover to some extent in the fourth quarter.

SG&A expenses, as a percentage of net sales, rose 62 bps to 24.7% thanks to higher marketing expenses to drive digital sales as well as the launch of new monthly women’s apparel subscription rental service — Nuuly. We note that SG&A expenses are anticipated to increase roughly 5% in the fiscal third quarter due to elevated digital marketing investments to drive digital channel sales. The company also informed that SG&A will include nearly $5 million of expenses related with the launch of Nuuly.

Wrapping Up

Being a multi-brand and multi-channel retailer, this Philadelphia, PA-based company offers flexible merchandising strategy. Further, it has a significant domestic and international presence with rapidly expanding e-commerce activities. Such well-chalked efforts position the company favorably for the upcoming holiday.

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Urban Outfitters, Inc. (URBN) - free report >>

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