What's Wrong With Urban Outfitters?

Retail hasn't fallen back into a recession, so what explains the weird losing streak of this hip, iconic clothes company?



Hold on to your TOMS shoes and skinny jeans - it looks like there's trouble at Urban Outfitters.

Since turning in a disappointing round of third quarter earnings, URBN Inc. -- the parent company of Urban Outfitters, Anthropologie, and Free People -- has been taking a bit of a beating. Its stock is now down 27% for the year. And today, Bloomberg piled on with an article taking the retailer to task for losing its fashion sense.

Uh huh. Bloomberg. When a business wire is criticizing your clothes, you've got a problem. Even CEO Glen Senk acknowledged the company's most recent results "fell short."

What's wrong? In a word, women. Female shoppers aren't in love with the product lines at either Urban or Anthropologie. And the company is scrambling to find a fix.

Mediocre Sales

Urban's sales actually increased overall. But the underlying numbers weren't pretty. Its inventories of unsold clothes are up 27% for the quarter. And its gross profit margins slipped because stores had to slash prices on so much merchandise. By the all important measure of comparable retail segment net sales--essentially purchases made either online or at stores that have been open for more than a year--the company was also down for the quarter. Urban Outfitters was flat on that measure. Anthropologie fell 7%. The bottom line: Two of the company's three big brands are floundering.

On the one hand, it'd be easy to blame the economy. Rising cotton prices have whacked clothing companies across the board. And Urban's brands sit in fashion's mushy middle, caught between the luxury retailers and box stores that are thriving. But some of its chief mid-market competition has done just fine lately. Abercrombie & Fitch and American Eagle both boosted their comparable store sales. Limited Brands, owner of Victoria's Secret, also fared well. True, Gap Inc. saw its profit drop 36% for the quarter. But nobody wants to be mentioned in the same breath as the Gap right now.

Murky Solutions

Urban's management says the problem is straightforward. Customers simply weren't happy with the clothes. On an earnings call with investors, Senk said the big weak spot at Anthropologie was tops, which make up more than half of apparel purchases at this time of year. "This is a fashion issue, plain and simple," he said. "We need more compelling product, and the team is hard at work mining the selling attribute information and challenging the supply chain to adjust and move as quickly as possible to improve the offering."

Translation: We know we've got a problem. We're still working on a solution.

As for Urban Outfitters itself, Senk has high hopes for the holiday product line. We can only wait and see if he's justified.

According to Bloomberg, though, Urban's looks were far from the only problem. Yes, they may have jumped too quickly on the bell-bottom trend instead of peddling more skinny jeans. But there were basic PR and management issues too. Urban Outfitters was publicly accused of ripping off a necklace design--a controversy which pitted them in a public battle with Miley Cyrus, of all celebrities. And the company has started making sloppy merchandising mistakes, such as mixing expensive and mid-priced merchandise in the same display.

The company is trying to revive its fortunes with a leadership shakeup, including a new CEO for Anthropologie. But they have their work cut out for them. Urban Outfitters has walked a fine line building its retail empire. Its namesake stores pioneered an accessible brand of hipsterdom that appeals to young American mall goers as well as real live urbanites--no small feat. Anthropologie sells an older, pricier version of chic, but its looks are still a bit off-center by the standards of a major retailer. It's hard to get mass-market quirk right in the first place. It may be even harder to get it back.