Urban Outfitters Turnaround Solid, Q1 Seen Strong

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TheUrban Outfitters ( URBN ) store on Manhattan's Fifth Avenue catered to a packed house at the May 9 opening night party for its month-long pop-up shop modeled after ancient marketplaces.

The shop showcased sustainable fashion and artisan's clothes using eclectic prints, patterns and traditional fabrics made by designers from Africa, Asia, North America and Europe.

The rest of the store was also filled with shoppers, who were scoping out Urban Outfitters' own summer collection that hit the store this month.

Shelves were lined with jeans, dresses, hats, tops and handbags that popped with bright colors and wild prints.

At least a dozen customers queued up at checkout to pay for their purchases. Judging from its recent track record, many other Urban stores have been drawing similar crowds in recent months. The company, which operates stores under the Urban Outfitters, Anthropologie and Free People names, has seen sales increase by at least 11% the past three quarters and profits climb by at least 20%.

Urban is in the midst of an impressive turnaround after some missteps slowed growth in late 2010 and 2011. A management team led by CEO and co-founder Richard Hayne has overhauled merchandising, inventory management, e-commerce and other aspects of the business from top to bottom over the past year or so.

Their efforts should bear fruit when Urban reports first-quarter results on Monday after the close.

Management Team

"After several merchandising and leadership challenges, the company now has a management team with clear responsibility and direction, and as a result, the first quarter of 2013 is shaping up to be a very good quarter for them from a sales perspective across all brands," said Barclays analyst Matthew McClintock.

Analysts polled by Thomson Reuters see first-quarter earnings rising 26% to 29 cents a share. They forecast sales will climb 15% to $655.07 million.

In an April 1 SEC filing, Urban Outfitters said thus far into the first quarter ended April 30 its retail segment same-store sales were up in the high single digits from a year earlier.

RBC Capital Markets analyst Howard Tubin estimates the company's first-quarter same-store sales rose 9% vs. a year ago. That would be a "standout" performance, he says, given the negative impact cold weather has had on many retailers.

"Most of the companies I cover have been suffering from a winter that never ends," Tubin said. "Despite the weather, Urban Outfitters appears to be outperforming. That speaks to a merchandise assortment that's more attractive across their divisions."

Urban's customers, he adds, are more fashion-forward and conscious of trends and if trends are well represented.

Tubin says it looks like Urban has got the fashion and the trends right, which is why it's performing better than average.

That's showing up in its results. Fourth-quarter earnings rose 107% to 56 cents a share. Sales grew 17% to $856.8 million. Same-store sales, which include its e-commerce and catalog businesses, rose 11% vs. a year earlier.

But it's taken some doing -- and a major management reshuffling -- to get there.

At the core of the turnaround, says McClintock, was Hayne replacing Glen Senk as CEO in January 2012. Hayne had been CEO until 2007, when Senk took the post.

Prior to returning to the helm last year, Hayne had been Urban's chairman, a post he had since the company's incorporation in 1976. But as chairman, he was more "distantly involved" in the company and was focused on smaller initiatives, says McClintock.

Once at the helm, he oversaw management changes that have worked to Urban's advantage. One month after Hayne became CEO, another executive, Godfrey Marlow, returned to the team. Marlow was named CEO of the Urban Outfitters Group, in charge of the namesake brand globally. Marlow had spent nine years as president of the brand prior to retiring in 2010.

Urban Outfitters is the company's biggest sales generator, accounting for roughly 50% of total revenue in 2012.

"The shuffle of the senior leaders impacted the merchandising and merchandise assortment," said Tubin.

In 2012, the new/old management team started to gel again and the morale increased, he said.

The big change came on the fashion front, which the new team brought back on trend, first at Urban Outfitters, then at Anthropologie, he says. The Free People brand, he said, had remained strong through the tough times.

"At the end of the day, leadership has been strengthened and focused, and the discipline is back in place," said Ascendiant Capital Markets analyst Liz Pierce.

Management has a good understanding of who the customer is and what the customer expects, which comes down to product, she says.

At Urban, Marlow truly understands Urban Outfitters' customers, and they expect products featuring "irreverent themes" combined with fashion trends. This customer, she adds, wants the unexpected and not the same themes over and over, which the new team understands.

Marlow is very familiar with the Urban Outfitters brand and oversaw a very quick turnaround, adds McClintock.

Marlow was able to turn things around by going back to basics, he adds, back to focusing on who the customer is. Before the turnaround, Urban Oufitters may have shifted away from its core customer.

Anthropologie CEO

Another executive change has been in place since November 2011, when David McCreight became CEO of the Anthropologie Group, responsible for the brand in North America and Europe. McCreight had been president of sports apparel outfitUnder Armour ( UA ) from 2008 to 2010.

Anthropologie was a "much more troubled" brand, says McClintock. "It didn't have good direction for several years," he said.

McCreight is new to the brand, so it's taken him longer to improve it, while Marlow had run Urban Outfitters in the past, he adds.

McClintock says Urban is in the fourth or fifth inning of the turnaround.

Analysts expect Urban to continue on the growth path. They expect full-year earnings to rise 19% to $1.92 a share. They see a 17% increase in 2014 and 12% rise in 2015.

"I expect the strength they see in the first quarter to continue for at least the rest of the year," said McClintock.

Overall, the consumer environment is just OK, says Tubin.

But, he adds, the consumer environment at Urban Outfitters and Free People is "fine."



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas

Referenced Stocks: UA , URBN

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