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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.

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