It has been a particularly grim retail season for the mall staples that defined landscape of the late ’90s and early 2000s.
Department stores appealing to all parts of the consumer spectrum — Macy’s, Nordstrom, Hudson Bay (operator of Lord & Taylor and Saks) — are in a big slump, and chains that live in the malls they anchor are suffering right along with them. Apparel chains like Gap (and Banana Republic and Old Navy) and J. Crew and specialty stores like Victoria’s Secret and Foot Locker have all spent the last few weeks telling their investors a series of sad stories.
Pacific Sunwear and Sports Authority have folded entirely under the pressure, and Sears is pretty visibly circling the drain.
And if this story feels like you’ve heard it before, you probably have, especially if you happen to be a longtime reader of ours. Karen Webster described this scenario in 2014 as The Coming Physical Retail Death Spiral.
“So that faint whooshing sound you’re hearing?” Yep, that’s the sound of the physical retail death spiral revving up,” Webster wrote of the singularly and visibly sluggish holiday shopping season at the mall in 2013 in early 2014. “ And the proof is in the sales numbers pudding.”
Now it is 2016, and that faint whooshing of two short years ago has turned into a loud and hard to ignore grinding noise as physical retailers nationwide are finding themselves largely caught in the gears of progress moving forward at an insanely rapid clip. And while much has changed in the last two years, one thing remains immutably the case: the truth is still in the sales numbers pudding.
And those numbers, as we have extensively catalogued over the last several weeks, have been pretty grim. There have been a few standouts. Walmart managed to shock the street and pop-up some gains, TJX remained physical retail’s most reliable power hitter and H&M continued in its nearly unquestioned demographic domination. But by and large, the story was more about misses than hits.
Which makes Urban Outfitters’ performance in the last quarter all the more notable. While other retailers of its description and demographic appeal base were reporting losses across the board and closing stores, Urban Outfitters (and its affiliated Anthropologie and Free People’s brands) was reporting gains and plans to open new locations. It’s also making progress of the eCommerce front, though unusually quietly in an age where it seems every retail tech upgrade is accompanied by a press release.
So how did Urban Outfitters get to be the sleeper success story of Q1?
The Better-Than-Anticipated Earnings
The headline numbers out of Urban Outfitters’ report from the first quarter of this year were stronger than analyst predictions across the board. Quarterly revenue was $762.6 million, a 3.2 percent increase year over year, and about $3 million higher than analysts’ average estimate.
Same-store sales in retail locations were up on average 1 percent from the same time in 2015. That growth was pushed by 2 percent same-store sales growth at Urban Outfitters stores, which balanced flat growth at Anthropologie and a 2-percent decline at Free People. Wholesale was up 16 percent.
“Although much has been written about the broad weakness in the apparel category, we believe we have the opportunity, regardless of industry trends, to improve the appeal of our assortment and find ways to delight her,” noted Urban Outfitter president David McCreight in a call with investors.
The Successful Rebrand (For Slightly Older And Richer Buyers)
About a year ago, Urban Outfitters announced that it was shifting its marketing efforts away from pursuing teenage, collegiate and post-collegiate shoppers — and instead pursuing their “older sister and cool aunts” (aka the people with money to spend). Urban Outfitters determined, by looking at the spend data on older millennial females, that there was possibly a largely under-pursued market for people who were less interested in being forever 21, and a lot more interested in just being fashionably 30.
It was a strategy, notably, that before earnings was drawing mostly head shaking and concern. It wasn’t being mentioned on social media and, as far as some experts could tell, it just wasn’t catching on.
But it was a drum Urban Outfitters was playing post-successful earnings run.
“Our vision has been to grow within our current customers’ life stage and interests by strategically expanding into specific categories based on her purchase behavior,” McCreight noted. “We have spoken to you about the investments in the teams, marketing and delivery mechanisms, in order to grow existing categories, as well as to expand into these new categories.”
Those categories include things that one might expect (such as expanded presence into accessories, shoes and home goods) and also some pretty ambitious prototype programs, like in-store custom dress making (supported by online dress shops) and enhanced beauty efforts that include both cosmetic sales and in-store beauty shops.
Those are supported with large store footprints, mostly notably in Portland and Newport Beach, where they’ve introduced massive, multi-department and mini-shops containing Anthropologie stores.
“This larger footprint provides us with the ability to present a broader offering in the expanded categories, including a petite shop, expanded jewelry and accessories, an intimates boutique, an 800-square-foot beauty shop, a full-service shoe salon as well as over 6,000 square feet of home,” McCreight noted. “Additionally, we have dramatically reduced the back-of-house in these locations to maximize the selling space and are supporting them with more frequent replenishments.”
And while it may not be attracting mentions on social media, the sales numbers at the expanded locations are encouraging, particularly in shoe and beauty sales, and counter to current trends, growth is on the horizon for Urban Outfitters. They are opening more stores — across all three of their lines — and opening up large, more departmentalized stores as they attempt to perhaps attempt to reinvent the department store for older millennials and young Generation X members.
The Quiet eCommerce Mover
Also interesting, though less loudly trumpeted during Urban Outfitters’ victory lap post-earnings is how digital is increasingly — though quietly — augmenting their efforts.
Though it did get some interesting mentions, McCreight noted that the expanded store design and functionality, especially with custom dressmaking and beauty services, is part of a total push to build a better total system as a whole for their customer base.
“The goal is to provide enough representation of the expanded assortments to become a destination for in-store purchases, while driving her online, where she can shop the broader assortment. Success will be measured by activating a larger assortment on line, so that the combined store and digital spend of the surrounding area grows.”
Urban Outfitters does not directly report eCommerce figures; it includes them under the general category of direct-to-consumer sales. But, as Urban Outfitters CEO Richard Hayne noted, they are extremely important because they are clearly the future of the firm’s growth engine. Hayne told analysts online sales grew by double digits year over year, outpacing sales performance in the retailer’s bricks-and-mortar locations.
And it is growth the firm is clearly anticipating and getting ready to build out. Last year, Urban Outfitters constructed a $106 million fulfillment center in Lancaster, Pennsylvania. Last week they purchased the adjoining 43 acre parcel to the 1.6 million square foot fulfillment center for $6.3 million, according to courthouse records.
Currently, Urban Outfitters says it has no immediate plans for the space, but purchased it for unspecified future expansion.
So is Urban Outfitters the future of physical retail commerce? Probably one good quarter is not enough for the designation, even if they did well when everyone else didn’t.
But what is clear is that Urban Outfitters is thinking different about the problem differently than its rivals, many of whom are trying to figure out how to contract to fit the new market that requires fewer physical retail nodes. Even if Urban Outfitters’ efforts don’t work, there is something certainly admirable and interesting about its attempts to go a different way and grow into the market instead.