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Urban Outfitters surprises in Q3 on strong earnings, sales

BY Marianne Wilson

Urban Outfitters on Monday reported sales and earnings that blew past Wall Street estimates, fueled in part by a strong performance from its Free People brand and online sales.

Urban Outfitters earned $45.1 million, or 41 cents a share, in the quarter, compared with $47 million, or 40 cents a share, in the year-ago period. Analysts had expected per-share earnings of 33 cents a share

Sales rose 3.5% to $893 million, a record for the company, Urban Outfitters said. Analysts had expected sales of $861 million.

Same-store sales, which include the comparable direct-to-consumer channel, rose 1%. Excluding the estimated impact of the North American hurricanes in the quarter, comparable retail segment net sales increased 2%. By brand, comparable retail segment net sales increased 5% at Free People, 2% at the Anthropologie Group and 1% at Urban Outfitters.

“Record sales were driven by improved apparel execution across all channels and brands,” said Richard A. Hayne, CEO.

Neil Saunders, managing director of GlobalData Retail, said that despite the company’s good quarter, there are still some weaknesses in Urban Outfitters’ performance, including “over-reliance” on its Free People brand.

“Urban Outfitters, and to a lesser extent Anthropologie, are still dropping off the radar of some consumers,” he said. “To remedy this, both brands need to develop a much clearer and more compelling handwriting that resonates with the core customer.” For more, click here.

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Analysis: Urban Outfitters needs to fire on all cylinders—not just Free People

After a string of poor results, today’s numbers from Urban Outfitters make for happier reading. The 3.5% uplift in total sales is welcome, but it is the return of all brands to positive comparable sales that is most agreeable. This rise came despite the negative impact of the hurricanes on some stores: without this, overall comparable sales would have risen by 2% rather than the reported 1%.

As good as the numbers are, there are still some weaknesses in Urban Outfitters’ performance. Foremost among these is the growing disparity between stores and the online operation. The latter continues to grow strongly, while the former is still in decline. Although the two trends balance each other out in sales terms, the impact on profit is negative because of the higher costs associated with fulfillment. This is not a new dynamic, but it is one that Urban Outfitters is still largely failing to address.

The impact of online joined with a couple of other trends in depleting gross margin by 142 basis points over the period. One of these was the higher proportion of lower-margin furniture products in the sales mix. The other was a higher percentage of lower-profit international sales. Taken together, these things contributed to the 4.8% decline in net income over the prior year. Admittedly this is a better outcome than the 31% decline posted over the nine months to-date, but it is still one that leaves Urban Outfitters in the red when it comes to profit growth.

Putting these specific issues to one side, the better performance was also delivered against a more positive backdrop for apparel where demand was stronger than it has been for most of the year. This is not to take away from some of the progress made by Urban Outfitters, but it does suggest that when put in context, the company still has some work to do to lift its performance.

In this regard, we maintain our view that 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.

We also believe that the clothing offer is too eclectic, although fall and winter ranges appear to have a little more cohesion. Even so, Urban Outfitters, and to a lesser extent Anthropologie, are still 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.

Free People does a much better job at creating a unique and interesting offer, which is one of the reasons its performance has been so much better. However, the Urban Outfitters’ over-reliance on this brand — where comparable sales rose by 5% — is problematic. To sustainably boost performance the company needs to be firing on all cylinders, not just one.

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Analysis: Abercrombie still in transition, but starting to show signs of life

After an extended run of decline, Abercrombie & Fitch is finally back with a market-beating 4.5% uplift in total sales. Although the result comes off the back of a weak prior year comparable, it nevertheless provides comfort that the group’s strategies are starting to bear fruit.

As good as the headline figure is, it masks disparities between A&F’s two core brands. Hollister’s 8% increase in comparable sales is impressive and represents a significant acceleration from the first half of the year. Meanwhile, Abercrombie is still in the red with a 2% drop in same-store numbers – a disappointing outcome, but one that marks a significant improvement over the double-digit declines the brand was previously recording.

That Hollister is performing better than Abercrombie is not surprising. Hollister’s brand reinvention program is more advanced, and initiatives like the Club Cali loyalty program have had much longer to play out. As a result, the brand is engaging far more with its customer base and enticing them with relevant on-trend product across categories like denim and intimates.

Abercrombie has not been neglected, but the division’s reinvention is at an earlier stage and so financial results are nowhere near as positive. Arguably, the task of finding a new voice and pitch for a brand that carries so much baggage has been far more difficult than Hollister’s reasonably gentle evolution. However, having seen the work undertaken at Abercrombie, we are confident that progress is being made and that the direction of travel is correct.

On the product front, there have been significant improvements in quality, especially to fabric and stitching. Subtle detailing, like more stylish buttons on shirts, has also helped to give basic garments a lift. On top of this, the big logos of the past have been firmly ditched in favor of no-branding or very subtle A+F monograms. The net effect is a range that is more mature and sophisticated, with much more emphasis on fit and function than branding.

The new Abercrombie prototype store, which has been opened in a select number of locations, is impressive. It is revolutionary rather than evolutionary and is a significant step forward for the brand. The two most immediately striking things about the new design are how light and open it is, and how subtle the branding is. Alone, these make the shops almost unrecognizable as A&Fs.

Beyond these significant shifts, there are more subtle changes too. Foremost among these is the smaller footprint, with some new prototypes being around half the size of older stores. This is made possible by a much more efficient use of space and also because ranges have been thinned out. A&F is now putting more weight behind key items and cutting back on slower, less relevant lines.

The consumer impact of all these changes is positive. The new format is more pleasant to shop, and the ‘less is more’ approach makes putting outfit ideas together easier. From A&F’s perspective, the new format provides financial benefits, with higher sales densities and lower rents.

With only a handful of new stores open, the impact on Abercrombie’s sales is currently small. However, this should grow as the concept is rolled out further. In the meantime, we believe that there is much more work to do in reconnecting the brand to customers. While initiatives like the loyalty scheme are working well, Abercrombie needs to communicate its new essence more effectively and more widely.

Overall, Abercrombie & Fitch is still a company in transition and is not back to full health. However, it is now showing some encouraging signs of life.

 

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