Urban Outfitters, Inc.'s (NASDAQ:URBN) quiet promotional strategy at UO in 4Q was a result of brand strength, but in hindsight management does not think promos were appropriately communicated to the customer and sales suffered as a result. Additionally, January is no longer a clearance month in the consumer’s mind and there wasn’t enough fresh apparel. 2017 initiatives will focus on product newness/velocity, as well as continued distortion of investment into the DTC channel (faster delivery speed, more customer communication) and better use of data analytics (e.g. personalized emails). URBN expects 50% DTC penetration in the next 3-4 years.
Choppy traffic trends (“higher highs and lower lows”) are consistent across URBN’s mall, lifestyle center and urban locations, as well as geographic regions. The company’s mall stores are pre-dominately in A malls, and BAML thinks weakening traffic trends are heavily weighted toward B/C malls. Declining traffic at URBN stores is more of a reflection of a shift toward online shopping versus some of its competitors, who are more widely dispersed across A/B/C malls and have fewer off-mall locations.
Management sees signs that the fashion trend toward higher-waisted, wider-legged pants is here to stay. Bottoms are trending well at all three brands (though the Anthro customer is slower to adapt new trends), and “skinny” is no longer the best-selling style.
Operating margin (OM) in 1H will be pressured by occupancy deleverage (due to 11 net new stores openings), markdown and initial-markup (IMU) risk, and a higher SG&A growth rate. Markdown risk pertains to underperforming women’s apparel categories at Anthro/UO, while IMU risk relates to a heavier reliance on speed to chase at Anthro as management seeks to find a product assortment that resonates with the customer. BAML expects a mid-single-digit SG&A growth rate to outpace comps and to be driven by new store opening costs. BAML is modeling 280bp/130bp of OM contraction in 1Q/2Q. BAML thinks URBN remains a solid story in a challenging environment and maintains its Buy.
The companies mentioned in this article are subjects of research reports issued recently by investment firms. Their opinions in no way represent