Urban Outfitters wants to double sales by 2020

Urban Outfitters wants to double sales by 2020

Urban Outfitters has set out ambitious plans to double its topline sales by 2020 through an expanded product offering, enhanced customer experience, and wider distribution. The news has been met with a mixed reaction from analysts.

Growth plans and initiatives outlined by Urban Outfitters yesterday (24 September) call for a doubling of revenue, achieved at industry-leading levels of profitability.

But while the strategy may be simple, the execution will be complex, according to Stifel analyst Richard Jaffe.

Five-year initiative
The first strand will involve the expansion of products and services, aimed at increasing the company's share of customers' wallets by giving them more of the products they want.

"One way that the company plans to achieve this is by offering the customer an expanded assortment (more sizes and colours) and additional styles online," Jaffe notes.

"Anthropologie home, Urban Outfitters beauty and shoes and Free People intimates and party dresses are examples of existing category expansions. New product categories are an additional way to gain wallet share. FP Movement, Urban Outfitters Without Walls and beauty and registry at Anthropologie are examples of recent successful category expansions; more are expected in the future."

Enhancing the customer experience will be another strand. Management, Jaffe says, is focused on constantly improving the store experience. "However, captivating product imagery online is key to driving brand awareness and strengthening customer engagement. Strong customer engagement is the antidote to continued margin erosion due to discounting."

Management will also look to grow distribution through retail stores, direct, and wholesale.

While store growth is limited, management told analysts, there is "significant opportunity" to expand the store footprint to offer customers additional products and services.

North American annual square footage is expected to increase in the double digits annually long-term due to the conversion to larger store footprints. Excluding the larger store format, square footage would increase in the low single digits, Jaffe explains.

In order to drive e-commerce growth, the company plans to offer more product and categories online, enhance the virtual experience, and expand internationally.

"Given the high profitability of e-commerce sales, arguably the highest in the company, we believe management's focus on growing direct is the correct strategy," Jaffe said.

Wholesale will also expand. Free People wholesale is currently in around 1,500 stores. However, there is opportunity to increase the square footage at domestic stores by expanding product categories. Internationally, Free People will continue to rolliout its successful shop-in-shops while focusing on improving wholesale marketing.

Encouraging strategy
RBC Capital Markets analyst Howard Tubin says he is encouraged by the company's long-term plans.

"Our key take-away from the day was that this management team, at both the corporate and divisional level, has a thorough understanding of its customer and their complete lifestyle wants and needs."

This was particularly evident, he notes, in the company's plan to open and test larger-format stores across all concepts.

FBR & Co analyst Susan Anderson also offers some upbeat views on the plans, describing the brands as having "long-term growth potential" and highlighting the group's positive supply chain initiatives.

Urban Outfitters is currently in the process of opening its East Coast fulfilment centre in Pennsylvania, which will house combined retail/e-commerce/wholesale fulfilment. This, Anderson says, will likely create inventory, labour, and supply chain efficiencies.

Other positive initiatives, Anderson notes, include drop shipping directly from vendors, same-day delivery (being piloted next year), order online/pick up in store, and global inventory, which unlocks product to be used in any region.

A work in progress
But while she also points to the encouraging performances of the Free People and Anthropologie brands, Anderson believes the doubling of revenue by 2020 may be challenging.

"[It] likely requires a 12% CAGR from our 2014 revenue estimate, which could imply aggressive comp assumptions (though international and wholesale growth will likely help). In addition, expansion into additional product categories, such as home, may decrease the long term steady state operating margins."

Anderson adds that the turnaround at Urban Outfitters is likely to be "a work in progress", with online seen performing well, but stores pressured.

"[This] could continue to pressure results until it can get the older consumer back in the store. We remain on the sidelines until we see an Urban Outfitters turnaround emerging, comp re-acceleration at Anthropologie, or a more attractive entry point."

The brand, however, is certainly "on the mend", analysts pointed out last month when the lifestyle retailer revealed second-quarter earnings above consensus estimates and an increase in sales.

Management has been cautiously optimistic regarding a turnaround at the Urban Outfitters division as the improved merchandise assortment gains traction. But analysts believe this improvement, combined with continued strength at both Anthropologie and Free People, should drive better results in the third-quarter.