Analyst: Urban Outfitters, Anthropologie off pitch when it comes to apparel
While Wall Street cheers Urban Outfitters for not doing quite so badly as forecast, the reality is that this is a lousy set of results. Not only are the numbers sequentially worse than a pretty dire first quarter, but they also show that many of the initiatives put into play remain a long way from delivering.
The overall sales decline of 2% is poor, although the number would have been materially worse if it wasn't for a relatively strong wholesale performance where revenues increased by 10%. Outside of this area of advancement, the rest of the group is in a tailspin.
Retail sales were down by a sharp 3.1% on a total basis and by an even worse 5% in comparable terms. Behind this is a dramatic same-store fall of 7.9% at the Urban Outfitters brand, and a 4.0% dip at Anthropologie. Only Free People managed to generate growth, but the 2.9% uplift proved wholly insufficient to offset the declines in the larger parts of Urban's business.
If the sales drops weren't bad enough, they were accompanied by a deterioration of 440 basis points in gross profit. This was mostly thanks to far higher markdown activity, which was necessary to clear down inventory that would not sell at full price. The impact on the bottom line, which was also affected by higher logistics and delivery charges, was a 35.1% tumble in net income.
Urban management has often spoken of the challenges in physical retail and the difficulties associated with growing store sales. We believe there is some truth in this assertion and are the first to recognize that some of the company's stores are exposed to locations where footfall has been soft. However, we also believe that the excuse is a distraction from some of the real issues at the company which, in our view, are mostly around the products.
The blunt truth is that both Urban Outfitters and Anthropologie are firmly off pitch, especially when it comes to apparel. Bluntly put, their collections are decidedly odd and all too frequently look like an art installation rather than saleable merchandise. As much as this wins some fans, it also deters and confuses many more mainstream shoppers. Admittedly there are some good pieces and lines within the jumbled assortment, but finding them is difficult and too much effort for all but the most committed consumers.
This is one of the reasons that online has performed so much better than stores. Certainly, the general direction of travel in retail is more supportive of digital growth, but we also believe sorting and sifting through the Urban range online to find acceptable items is far easier than in stores.
Given that apparel is the mainstay of the offer, an ill-defined and mistargeted collection is extremely unhelpful for all of the other things Urban Outfitters and Anthropologie sell. Both brands market themselves as lifestyle destinations, but when the overall brand image is unclear, it is harder to create traction across the whole product mix. Fortunately, some embryonic categories like home remain in growth simply because of their immaturity, but we believe they are falling a long way short of potential.
Looking ahead, Urban has promised more discipline and focus on ranges. We can see some early signs of this in the latest collections, but we think there is a long way to go before they are on track and winning back shoppers.
Will sales clauses in leases soon become obsolete?
The retail landscape today looks different than it did just a few years ago. Brick-and-mortar retail is becoming more diverse. Brands are embracing different operational models and integrating more closely with online and mobile channels. Retailers like Bonobos, Warby Parker and Restoration Hardware are using physical locations purely as showrooms, a new trend that appears to be gaining significant traction.
The implications of these changes are varied and profound. For now, I want to focus on one particular issue. That issue centers on a single question: when a retailer reports sales numbers, what exactly are they reporting?
To put it another way, in a world where the clear lines between online and brick-and-mortar sales are blurring, how do we determine which channel gets the sales “credit” for any one transaction?
Consider these real-world examples from my own experiences. I recently ordered some Restoration Hardware bathmats through a brick-and-mortar location. I subsequently returned them for a different color, an exchange I conducted online. Is that a brick-and-mortar sale or an online sale? In a different scenario, I placed an online order with Bonobos, and ultimately wound up making an exchange at a brick-and-mortar Bonobos store where the item came from their warehouse. What kind of sale is that?
Those are just two examples in my own life – there are countless other permutations. Even if we determine which of those transactions is recorded as an online sale or a brick-and-mortar sale, it doesn’t begin to account for the true unknowns. For example, an online purchase prompted from a consumer walking past a storefront earlier in the day could be a questionable sale, or the opposite, someone using online or mobile tools to get a sense of what’s available and where the best price might be, then visiting a physical store to make a purchase.
It’s complicated, right?
The real question is why does any of this matter? It certainly provides some fodder for media writing dramatic headlines about the demise of brick-and-mortar and the ascendance of online and mobile sales. But does it matter to the retailer? Does Old Navy care whether the dollars on their bottom line got there through an online funnel or an over-the-counter transaction in a physical store?
On one level the answer is no, not really. A dollar is a dollar is a dollar. However, it does matter – potentially quite a lot – once we start thinking about the impact on leases and what gets reported to the landlord. Some rents are calculated based on sales, and many leases have sales-based provisions, incentives or kickout clauses that are triggered by a specific sales figure. While the retail landscape may be evolving rapidly, leases don’t change nearly that fast. Unless a lease has been signed fairly recently, it almost certainly doesn’t account for the online/inline nuances and gray areas that have emerged. Think about a retailer in the eight year of a 10-year lease. Consider how much has changed during that time. Ten years is a long time in the world of retail, and an even longer time in the world of online tools and mobile technology. To put it into perspective, the first iPhone had just been released a decade ago.
A new retail taxonomy
So what options do landlords have? How do they know that what they are getting from their tenants is an accurate reflection of brick-and-mortar sales? How do they address that “channel uncertainty” in their leases? Can they stop retailers from what amounts to creative reporting of sales to trigger opt-out clauses or to suppress rents? Auditing might be possible if both sides agree, but if it isn’t clear to the retailer how to categorize a sale, how can landlords be expected to monitor such a thing?
For sales-based leasing language to be meaningful and enforceable, the retailers and landlords would have to stipulate/agree to meticulous transaction tracking and categorization. Furthermore, to address the complexities and uncertainties I mentioned above, the industry would likely have to develop a kind of standardized “taxonomy” for all the different categories of retail transactions in a multichannel world.
I suspect what is more likely is the leasing language will change. Leases will, by necessity, become much more simplified. With sales figures becoming malleable to the point of being meaningless, sales clauses in leases will be somewhere between irrelevant and unenforceable, and will likely go away. We may see conditional clauses based on different metrics (co-tenancy specifications, for example), or we might just see the industry move toward a simpler leasing structure. Perhaps something more akin to a residential lease, where breaking the lease early incurs a financial penalty. Even now, some retailers are not required to report sales. So we certainly could be moving in that direction.
That’s all in the future, for leases that have yet to be written and negotiated. The difficulty right now is that landlords have no leverage, and retailers have no incentive to renegotiate existing leases. This is a challenging time for landlords trying to adjust to an evolving and increasingly multichannel industry.
Jeff Green, President and CEO of Jeff Green Partners, puts more than 30 years of real estate industry experience to work on behalf of retailers, property owners, developers and municipalities. He can be contacted at [email protected].
Brick-and-Mortar Retailers’ Secret Weapon: Conversion Rate Optimization
Given the difficult business conditions so many brick-and-mortar retailers are facing, it’s baffling that conversion rate optimization (CRO) hasn’t become more of a focus if not an obsession.
In the online world, CRO has become an industry onto itself, spawning a global community of consultants and service providers, formal methodologies and over a hundred books dedicated to the topic on Amazon alone. There is only one book on brick-and-mortar conversion listed on Amazon.
There are a number of factors that may be preventing CRO from taking hold with brick-and-mortar retailers, but just like online marketers discovered after the dot-com bust in the early 2000’s, focusing on conversion can not only help them survive, but even thrive despite traffic declines.
Tracking Conversion vs. Optimizing Conversion
Most major tier-one retailers today track traffic and conversion rates in all their stores, so the basic data needed to conduct CRO already exists. However, the variability in physical stores makes applying conversion improvement initiatives across stores consistently a challenge, and it also makes measuring results more challenging too.
Testing and Measurement to Prove Results
A vital tenant of CRO is testing and more specifically A/B testing. In the online world this is easily accomplished by setting up two variations of a webpage and then directing an equal amount of traffic to each site. But A/B testing is much more difficult for brick-and-mortar retailers since, unlike websites, every store is unique.
So unlike online conversion rate optimization where changes can easily be made and consistently applied with a few keystrokes, in brick-and-mortar stores adjusting variables like staff levels for example must be applied at the store-level.
There’s another important difference between online and brick-and-mortar conversion optimization tests: traffic. In an online experiment, traffic can be precisely controlled so each website version receives the same amount of traffic.
In brick-and-mortar stores, the amount of traffic each store receives can’t be controlled and can vary significantly by store. Extra care needs to be applied when interpreting brick-and-mortar conversion optimization test results.
But just because the conversion variables are harder to control in physical stores doesn’t mean that conversion rates can’t be optimized or measured using A/B testing.
Start with the Biggest Conversion Driver – People
An effective CRO system for brick-and-mortar retailers must begin with ensuring staff schedules are aligned to store traffic patterns. Second, retailers need to examine how staff are deployed – tasking versus servicing customers. Third, retailers need to measure associate and manager productivity by analyzing conversion rates by hour attributed to each employee.
Conversion Rate Optimization can Mitigate Traffic Declines
In today’s rapidly changing and difficult environment, brick-and-mortar retailers should focus on the traffic opportunities they do have and apply CRO strategies. Just like the online survivors of the dot-com bust, brick-and-mortar retailers need to realize that it’s not just about the amount of traffic in their stores, but what they do with the traffic that matters most.