By Håkon Helgesen
Although Urban Outfitters performance has been slowing for some time, this set of results establishes a new low. Previously, the company has always managed to eke its overall growth into positive territory; but this time dire performances at both the Urban Outfitters and Anthropologie brands have put pay to that. Admittedly, Free People performed better — growing by 1.5% on a same-store basis — but this was nowhere near enough to offset weaknesses elsewhere.
Urban continued to see double-digit growth in its direct to consumer channel. However, this came squarely at the expense of stores. A particular issue here is that it costs Urban more to fulfill from its online operation than it does from a store, so the direct channel’s cannibalization of sales is costing the company margin and hurting profits.
At the Urban Outfitters brand, total sales were down by 4.6%, and comparable sales slipped by 3.1%. The comparable sales slide at Anthropologie was an even worse 4.4%, although totals sales were helped by the addition of new stores which meant Anthropologie’s turnover was down by 1%.
There is no denying that these numbers were delivered over a period when demand for apparel was soft. However, there are also some internal factors which have affected Urban’s performance.
Foremost among these is the continued shift to online. Urban continued to see double-digit growth in its direct to consumer channel. However, this came squarely at the expense of stores — which shoppers are visiting less often and from which they are buying less. A particular issue here is that it costs Urban more to fulfill from its online operation than it does from a store, so the direct channel’s cannibalization of sales is costing the company margin and hurting profits.
In our view, while general footfall challenges in some locations are causing pain, Urban’s rather cluttered and confused approach to merchandising is also partly responsible for the decline of its stores. While Urban Outfitters and Anthropologie stores are not unpleasant places to shop, neither do they make the process of buying easy. The customer has to do a lot of work in finding the right product, which is one of the reasons increasing numbers are opting to buy online where sorting and filtering options make it easier to identify items of interest.
In our opinion, the clothing offer is too eclectic. Unfortunately, over the past few months, this seems to have become worse rather than better with some jarring and off-pitch styles creeping into the mix. The lack of cohesion is now creating a situation where Urban Outfitters, and to a lesser extent Anthropologie, are dropping off the radar of some consumers. To remedy this, both brands need to develop a much clearer and more compelling handwriting that resonates with the core customer.
The growth of online and higher rates of discounting in stores both damaged margins. As a result, operating income plunged by 58%, and net income slid by 60%. This is an unsatisfactory result that, should the decline continue, puts Urban in real danger of slipping into the red.
Looking ahead, the company has outlined a streamlining of its store operations, is taking a more conservative approach to store growth, and is trying to bolster talent across the apparel parts of its business. All these things will be helpful, but we feel that there is now lots of work to do in rebuilding customer confidence — especially at Urban Outfitters. As such, we see performance over the rest of this year remaining soft.
Håkon Helgesen is an analyst at GlobalData Retail.