There Are Several Growth Opportunities for Urban Outfitters'

There Are Several Growth Opportunities for Urban Outfitters'

Urban Outfitters has recently reported impressive third quarter earnings results. Both sales and net income enjoyed double-digit growth at 12% and 18%, respectively. The high growth was mainly fueled by its Anthropologie and Free People brands. Its biggest brand, Urban Outfitters, experienced a small decline, but the company is committed to improving the Urban Outfitters brand in the long run.

Urban Outfitters brand's declining performance
The Urban Outfitters brand is the largest revenue contributor of the company, delivering $341.9 million or 45.1% of total sales in the third quarter. While the other two brands, Free People and Anthropologies, delivered high retail segment comp growth at 30% and 13%, respectively, Urban Outfitters' retail segment comp decreased by 1%. According to Ted Marlow, the CEO of Urban Outfitters brand, the declining performance was due to missed fashioned calls, off-pitch marketing, and poor creative execution. Moreover, the North American young adult apparel industry has become extremely promotional, which makes the environment more challenging for many companies in the same industry. In addition, its women's fashion was too narrow, while the men's apparel business did not generate enough volume.

Several growth opportunities for Urban Outfitters
The company still sees long-term opportunities for its namesake brand in both North America and Europe. In North America, it noticed an excellent frequent price sell-throughs in several women's and men's categories. The company also considers the home business a good future opportunity as it had positive growth in third quarter sales. In Europe, Urban Outfitters has recently opened two great locations in Galeries Lafayette in Paris and Kalverstraat in Amsterdam; sales in those two locations have exceeded expectations. The company mentioned that the great initial performance in France had represented the brand opportunities in a pop-up shop format and a wonderful platform to communicate with French customers. This helped to drive a higher penetration rate in that market.

European operations of Abercrombie & Fitch and Gap
One of the company's peers, Abercrombie & Fitch , had declining performance in Europe with negative comps in both of its brands, Hollister and A&F. The company thought that it was at the bottom of the cycle, but it appears that the company's performance will keep declining. While the comp trend has not bottomed out yet, the overall economics remain quite cash-generative. Another peer, Gap , delivered better operating performance in Europe. It reported sales increasing from $206 million in the third quarter last year to $220 million in the third quarter this year. However, Europe still only accounted for 6% of its total sales.

From an income perspective
What income investors might like about Gap is its commitment to return cash to shareholders via both share repurchases and dividends. The company recently announced a $1 billion share buyback program, giving shareholders a 5.4% repurchase yield on the total market capitalization of $18.55 billion. Moreover, Gap also offers investors a decent dividend yield at 1.90% on a conservative payout ratio of 22%. Among the three, Abercrombie & Fitch's shareholders enjoy the highest dividend yield at 2.30%, while its payout ratio is also conservative at only 28%. Urban Outfitters is the only retailer among the three that does not pay any dividends to shareholders.

My Foolish take
In the near future, Abercrombie & Fitch could continue to experience declines in its European business. On the other hand, both Gap and Urban Outfitters could continue driving their businesses in Europe with different initiatives. When Europe recovers from its currency crisis, it will play a more important role in those three retailers' international expansion plans. Among the three, income investors might prefer Abercrombie & Fitch as it has the highest dividend yield and a decent payout ratio. Gap is also a good choice, not only because of its dividend but also the upcoming $1 billion repurchase program.

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Anh HOANG 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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