Urban Outfitters’ Omni-Channel Adoption And Its Pros & Cons

It is widely known that e-commerce is the future of apparel retailing, but for Urban Outfitters (NASDAQ:URBN) the online segment still does not contribute enough to drive overall growth. The company no longer reports e-commerce sales separately, but about a year back, even 50% growth in online sales made negligible contribution to net comparable sales growth. With e-commerce not getting big and U.S. buyers consistently shifting to web-shopping, Urban Outfitters, like others, has adopted omni-channel retailing, which essentially refers to integrating inventory pool across channels and creating a relevant shopping environment.

Omni-channel expansion will help the company improve cross-selling, drive online customers to stores, and even prompt them to spend more. Since the retailer is still in its expansion phase, it will not have to incur additional expenses related to store-fleet re-sizing from the perspective of omni-channel retailing. Integrating an inventory pool across the board will help Urban Outfitters rapidly expand its product portfolio online, which can bolster its e-commerce growth. However, rapid online and omni-channel expansion comes with an unwanted margin pressure created by additional packaging and delivery costs. Since omni-channel expansion is an inevitable move for the company, it might have to reduce its discounting or cut expenses in other avenues, to counter the decline in operating margins.

Our price estimate for Urban Outfitters stands at $38, which is about 30% ahead of the current market price.

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Urban Outfitters’ Omni-Channel Adoption

The need for omni-channel retailing stems from the fact that,  even though U.S. buyers have been increasingly abandoning physical stores for convenient online shopping, their experience has not been too good. According to a research by Dyn, an Internet performance company, slow-loading webpages, intricate check-out systems and the hassles of mobile shopping, prompt almost 30% of customers to abandon shopping mid-way. ^[1] Thus by providing an omni-channel environment with ample convenience and incentives, companies can retain these customers.

To this end, Urban Outfitters is trying hard to offer the best of both — the digital and the physical world — to its customers. By leveraging customers’ online shopping experience and their vast store presence, companies can propel their overall comparable sales growth, provided they integrate inventory and back-end systems effectively. Urban Outfitters has been deploying several initiatives centered on website optimization, check out, search, personalization and mobile app enhancements. It is also expanding its store base gradually in order to have an optimum presence in the country necessary for omni-channel retailing.

The Philadelphia based retailer uses MongoDB’s database, which has served the retail sector well, for its e-commerce and omni-channel innovations. MongoDB’s platform helps Urban Outfitters enhance capabilities, accelerate design and launch of apps, and enrich overall customer experience. In addition to providing ideas, MongoDB develops new features and provides back-end support during peak seasons. The document oriented database company has played a pivotal role in developing Urban Outfitters’ in-store pickup service and personalization features. ^[2]

Pros

The biggest positive of omni-channel for Urban Outfitters is that it can attract those customers to its stores and websites, who would have shied away if the inventory pool across channels was not integrated. By listing its entire store inventory over its websites, the company can ensure higher web traffic, which can be subsequently redirected to stores through various incentives. Omni-channel shoppers exhibit a tendency to shop more frequently and spend almost 3.5 times more than regular shoppers. In-store conversion rate amid multichannel options is four times higher than online-only conversion rates. If teh in-store pick up option is available for online orders, retailers can realize 7% higher net sales. ^[3]

Considering its omni-channel goals, Urban Outfitters current store presence in the U.S. works in its favor. An important component of omni-channel retailing is strategically placed store locations across the country, positioned to cater to incoming store traffic while serving as fulfillment centers, all without cannicalizing sales at nearby stores.  With this in mind, several apparel retailers are consolidating their existing store network and re-opening stores at desired locations. Urban Outfitters, on the other hand, is still in its expansion phase and can open stores at strategic locations without worrying about closing other stores. Therefore, the company does not have incur additional expenses related to store consolidation.

Cons

Omni-channel essentially means that online segment will play a much bigger role in Urban Outfitters’ growth going forward. While this is a positive for the company’s topline growth, it will come at an expense. Online by nature is a low margin business and a rise in its penetration in Urban Outfitters’ overall sales will have a negative impact on margins. In fact, in Q1 fiscal 2016, the retailer’s gross margins fell 141 basis points year over year partially due to higher delivery and fulfillment expenses coming from a rise in direct-to-consumer penetration. A similar trend was visible in the second quarter, when gross margins shrunk 71 basis points. ^[4]

On the outside, it appears that direct-to-consumer should have higher margins since it does not have deal with the expenses related to pricey retail stores. However, after factoring in the expenses related to storage, packaging and delivery of online orders, as well as sales mix (aggressive pricing over the Internet), the channel actually accounts for weaker margins as compared to the brick-and-mortar business. It is certain that Urban Outfitters’ push towards omni-channel retailing will be accompanied by an unwanted pressure on gross and EBITDA margins. In order to dilute this impact, the retailer may have to search for other avenues to cut its expenses, so its topline and bottomline can move forward at a similar pace.

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1. Dyn: Two thirds of shoppers unhappy with online experience, BizReport, Feb 17 2015 [↩]
2. Urban Outfitters puts MongoDB at the Center of eCommerce Innovation, Market Watch, Sep 24 2015 [↩]
3. Get Ready for More Omni-Channel Retailing, Colliers, Mar 10 2015 [↩]
4. Urban Outfitters’ SEC filings [↩]