Why Urban Outfitters Outperformed

After the doom and gloom earnings reports and guidance from several retailers like Macy's ,Target and smaller teen-retailer American Eagle Outfitters, how is it that Urban Outfitters (NASDAQ: URBN) managed to surprise on the upside...again?

Macy's blamed consumers buying cars, houses, and fixing up their homes.. That's no reason to extrapolate a similar change in spending to Urban Outfitters' demographic, millennials and college students who are renting (or living with the 'rents) and aren't driving either. They are living in urban areas, where the jobs are, either eschewing or postponing the American dream of the little house and the sweet ride. Add to that student loan debt, leaving clothes and entertainment as their only discretionary joys.

Clothes and entertainment
With this newly independent customer, Urban Outfitters can outperform teen retailers and department stores. Its stores are a destination shopping experience, a source of entertainment, with constant new and unique merchandise making a sure formula for continued rising revenue.

Urban's online presence is superior to most e-tail websites of bricks-and-mortar retailers. With most, it's still an afterthought, poorly executed and as interesting as filling out a form at the DMV. Urban's websites offer the latest indie music, fashion advice, how to decorate that first apartment, virtually a millennial lifestyle e-zine.

Check out a representative page of its UO site here. It operates 10 sites for its other brands: Free People, BHOLDN (weddings and special occasion apparel), Anthropologie, and Terrain (home and garden) as well. According to Bloomberg Businessweek, online sales have been growing at a faster clip than at the company's 500 retail stores, partly due to offering some items only online.

This attention to its core customers' lifestyle and digital penchant is responsible for a 9% rise in second-quarter cumulative comparable-same-store sales (Free People saw a 38% rise in comps), a boost of 25% in net income, and a $0.03 beat with EPS coming in at $0.51. Gross margin expanded by 169 basis points to 39.3%. According to CFO Francis Conforti, this was partly due to a reduction in markdowns, exactly what you want to hear from a retailer.

Although inventory rose 8%, that was mainly for new stores; retail comp stores' inventory was flat. Speaking of new stores, the company has been expanding, opening 10 new stores in the quarter and planning for 35 to 40 new stores through the end of the year.

The Free People rise in comps is worth detailing because it is breaking out as a lifestyle brand. Free People President Margaret Hayne said, "In addition to product, we offer information, entertainment and engagement. We inspire and inform her (the Free People customer) through our blog, catalogs, website, events, videos and social media channels." (source Seeking Alpha transcript). Free People is also run as a wholesale business to department stores like Nordstrom.

The company is expanding overseas, first in the UK and Japan. A pop-up Free People shop in London at Selfridge's flagship showed demand was strong for a freestanding-wholesale showroom, which opened in Marylebone in June. Pop-up tests also succeeded in Japan, so there will soon be Free People freestanding shops in the Shinjuku and very hot shopping district, Harajuku. The company will also be opening Urban Outfitters and Anthropolgie stores in Europe.

Targeting millennials
Both Macy's and Target are trying to win over millennials, since Target also charged that other age demographics are earmarking their dough for cars and houses. Macy's CFO Karen Hoguet said of the company's new line on the conference call, "Impulse, which is geared to our older millennial female customer, is beginning to gain traction as we continue to add more new brands. Our two most recent launches, Maison Jules, a private brand, and QMack, an exclusive brand by Jones, have both started off very strong."

Target's millennial strategy is hot, young designer collaborations, available to Target customers at much lower-than-designers' retail prices. One eagerly anticipated collaboration is 3.1 Phillip Lim for Target, already available to view in a lookbook and available in store Sept. 15.

Another millennial initiative is its CityTarget stores in major metropolitan areas, with the inventory appealing to apartment dwellers as it has more fashion-forward options. Free Wi-Fi and QR codes are available in these stores in keeping with the target demographic's love of tech. Three debuted last summer, with three more by year end. The concept was lauded with a number 10 rank in Fast Company's list of Most Innovative Companies of 2013. As successful as CityTarget may be, its bigger-box concepts haven't done as well as the recent earnings release showed, saying many of the same things as Macy's

Continued upside
Urban Outfitters, founded decades ago to fulfill a Wharton School of Business assignment (final grade A), manages to keep winning over young adults by staying fresh even as so many retailers are struggling. The company now ships to over 200 countries and looks to keep the momentum going worldwide. At a forward P/E of 18.8, a PEG of 1.3, and no debt, Urban Outfitters can keep giving you upside as it has won over the millennials and manages to stay cool.

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The article Why Urban Outfitters Outperformed originally appeared on Fool.com.

AnnaLisa Kraft has no position in any stocks mentioned. The Motley Fool recommends Urban Outfitters. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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