How Urban Outfitters Plans to Weather the Current U.S. Retail Drought

Things are not looking good for 2017.
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Photo: Cindy Ord/Getty Images

Photo: Cindy Ord/Getty Images

It's only May and the dismal earnings reports from American fashion retailers are already piling up. The latest comes from Urban Outfitters Inc., which saw comparable retail sales decline 3 percent, net income decline 60 percent and overall sales flat in the first quarter of 2017 compared with the same period last year.

By brand, comparable sales increased 1.5 percent at Free People, but decreased 3.1 percent at Urban Outfitters and by 4.4 percent at the Anthropologie Group (which includes BHLDN and Terrain). The retailer was hit by, unsurprisingly, low foot traffic in brick-and-mortar stores, though it didn't blame its poor performance entirely on outside forces.

During a call with investors, CEO Richard Hayne said that both UO and Anthropologie "missed" when it came to women's clothing. At Anthro, the assortment was too casual and lacked options for its customers' dressier occasions. At Urban, there weren't enough dresses, which are typically among the retailer's highest-priced items (and thus a big sales driver). 

Those issues aside, Urban Outfitters Inc.'s past couple of quarters have shown that the store traffic issue isn't going away; clearly, the many millennials who are feeling the brand right now are buying it online. Hayne even pointed to the fact that UO sales actually grew in Europe, where much of the product is the same, suggesting that retail traffic decline is a uniquely North American problem, the consequence of way too many stores and brands. “There are simply too many stores at too many malls in North America," he said. "We expect to see more closures and brands disappear until a healthier balance is reached."

But all hope is not lost, or at least that's what executives tried to assure investors on Tuesday. The company does not intend to expand its North American store footprint (a good call, probably), but sees plenty of opportunity in four other areas, where growth should offset the declines in store traffic and women's ready-to-wear. The biggest one is digital. The company restructured its digital arm from separate teams for each brand to one centralized configuration and has made hires in personalization, mobile and omnichannel integration. It plans to grow its social media audience, create more content including "more compelling" images and video, improve user experience on sites and apps, be able to tailor the online experience for each user, and improve customer service and delivery. Payne says digital sales "could double" within five years.

The second area of opportunity is international, given that international business has seen strong performance lately, but makes up less than 10 percent of Urban Outfitters Inc.'s sales right now, meaning there's lots of room for growth. The company plans to open several more stores internationally and is discussion partnership opportunities in the Middle East.

The third area is wholesale. Free People's wholesale business grew 14 percent in the quarter and Payne feels that given the talent of teams at other brands at creating products and experiences — "in other words, to create content," he said — there's an opportunity to sell more through outside retailers. He also hopes wholesale sales will double in the next five years.

Finally, there are the company's smaller brands, like BHLDN and Terrain, which are both part of Anthropologie and growing the most quickly of all of Urban Outfitters Inc.'s brands. 

Some of these initiatives will likely take a bite out of Urban's bottom line over the forthcoming quarters, but hopefully it will be worth it in the end, and these brands will make it out of what some are calling the "retail apocalypse" alive. Dun. Dun. Dunnnnnn.

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