Urban Outfitters: Does Black Friday Slowdown Indicate Holiday Sales Weakness?

Holiday season is the most important time of the year for apparel retailers such as Urban Outfitters (NASDAQ:URBN), as they can earn close to 20% of their annual revenues during the months of November and December, when buyers open up their wallets in a festive mood. Historically, one day shopping events such as Black Friday and Cyber Monday have played a crucial role in driving store traffic, which has resulted in significant growth in retail sales on these particular days. However, recent sales data shows that this is no longer the case.

Retail sales during the Black Friday weekend fell 11%, as retailers’ aggressive discounts and offers failed to entice customers. The National Retail Federation (NRF) expected 140.1 million customers at brick-and-mortar stores during the Black Friday weekend, down from 140.3 million in the year ago period. Instead, only 133.7 million shoppers showed up and they too spent less. Consumer spending during the weekend fell 11%, raising concerns that despite the improvement in economic conditions, buyers are not spending freely. ^[1] However, this does not indicate that the ongoing holiday season will be weak on account of macro-economic factors. It simply reflects the change in consumers’ spending patterns.

Our price estimate for Urban Outfitters at $42.5, implies a premium of about 30% to the current market price.

See our complete analysis for Urban Outfitters

Buyers Know that Discounts aren’t Exclusive to One Day Sales Events

While the Black Friday slowdown indicates retail weakness on the outside, NRF believes that fall in foot traffic and consumer spending during the weekend indicates that consumers were confident enough to ignore the initial wave of promotions. ^[1] Competition in the saturated U.S. retail market is fierce and buyers have limited their impulse spending in the aftermath of the economic downturn. Due to this, retailers across the industry have been relying on heavy traffic driving promotional activities throughout the year, and the holiday season is no exception. In fact, retailers get more aggressive on discounts during the holiday season, in order to capture a sizable share of consumer spending. Interestingly, several retailers launch their holiday products a month before the season even starts, in an attempt to gain a competitive advantage over their peers. Hence, shoppers know that they will get attractive deals even if they skip one day sales events, when stores are usually crowded. This is evident from the fact that overall retail sales and apparel sales in November improved 4%, and NRF maintained its 4.1% retail sales growth forecast for the holiday season, despite the significant sales decline over the Black Friday weekend. ^{[2] [3] [1]} In a conference call, NRF Chief Executive said that “the holiday season and the weekend are a marathon, not a sprint.”

Buyers Prefer Online Channel over Physical Stores

Another factor that contributed to traffic decline during the Black Friday weekend is the gradual customer shift to online channel. ShopperTrak reported a few of months back that foot traffic in U.S. stores had declined by close to 5% in almost every month of the preceding two years. ^[4] This was the case on Black Friday as well, when store traffic fell by 5% over the weekend, and online sales improved 9.5%. ^[5] Despite a decline in foot traffic, retail and apparel sales during November increased by 4%, and they are expected to go up by a similar amount in December as well. This clearly indicates that buyers are switching to the online channel (where products are usually cheaper) and are keeping the value and volume growth afloat.

However, it must be noted that online sales growth during Black Friday (9.5%) and Cyber Monday (9%) was significantly slower than the growth forecast (16%) for the entire season. ^{[6] [7]} This clearly indicates that buyers are indeed delaying their holiday shopping, even through the web channel.

What This Means For Urban Outfitters

Out of all the segments of the retail sector, apparel is the most competitive one. There are a number of multi-brand and specialty retail chains in the country, that are competing over product designs and prices. Urban Outfitters is among the more popular specialty apparel chains in the U.S., who had been resilient to the edgy retail environment until a year back. Its growth faltered this year as its namesake brand was unable to deliver compelling merchandise due to certain off-pitch fashion calls. Even though the retailer’s e-commerce revenues increased considerably during the first three quarters of 2014 (average ~40%), it did not have a material impact on results, because the segment did not contribute much to overall revenues.

The recent industry-wide sales data and trends indicate that Urban Outfitters will have to remain promotional throughout the season, to take advantage of the anticipated growth in retail sales during November and December. Also, since online retail spending growth is expected to significantly outpace overall retail sales growth, Urban Outfitters needs to effectively leverage its omni-channel platform to drive its web traffic to stores. Let’s look at what growth Urban Outfitters can attain during the season.

Overall retail sales grew by 3.1% in last year’s holiday season (November and December 2013), and net apparel and accessories sales increased by 2.3% during the same period. ^{[8] [3]} Sales in the apparel sector lagged overall retail growth by almost 80 basis points. Urban Outfitters reported sales of $716 million for the holiday season 2013, while overall apparel and accessories market during November and December stood at $41.61 billion. ^[9] This gives us a market share for Urban Outfitters during 2013 holidays of 1.72%. This year, based on 4% growth in apparel sales in November and NRF’s forecast of 4.1% retail sales growth for the season, we assume growth in apparel and accessories sales for the two month period to trail the retail market growth by a margin of 50 basis points. This implies that apparel sales can increase by around 3.6% in November and December 2014. This gives a potential apparel market size of $43.10 billion for the holiday season of 2014.

To calculate Urban Outfitters’ sales during the season, we assume that the company’s market share will decline slightly, due to weakness in its namesake brand and robust growth in sales of fast-fashion brands. Assuming Urban Outfitters’ market share at 1.70%, we arrive at an estimated sales figure of $733 million, which reflects a year over year growth of almost 2.8%. Although the growth potential in revenues is positive, it is significantly below what the company registered in the year ago period. Urban Outfitters’ revenue growth during the holiday season of 2013 at 8% was considerably ahead of the industry growth rate (2.3%). However, it appears that the company won’t be able to outpace the industry growth this year, due to increased competition from fast-fashion brands and its mainline brand weakness.

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1. Black Friday Fizzles With Consumers as Sales Tumble 11%, Bloomberg, Dec 1 2014 [↩] [↩] [↩]
2. Retail (Ex. motor vehicles and part dealers), United States Census Bureau [↩]
3. Clothing and Accessories Stores, United States Census Bureau [↩] [↩]
4. Shoppers Are Fleeing Physical Stores, The Wall Street Journal, Aug 5 2014 [↩]
5. Black Thursday? Thanksgiving sales numbers growing, CNN Money, November 30 2014 [↩]
6. Comscore Forecasts 16% Growth For 2014 Holiday Season, PR Newswire, Nov 18 2014 [↩]
7. Cyber Monday Slowdown as Consumers Strech Out Shopping, Bloomberg, Dec 2 2014 [↩]
8. Optimism Shines as National Retail Federation Forecasts Holiday Sales To Increase 4.1%, NRF, Oct 7 2014 [↩]
9. Urban Outfitters Reports Record Holiday Sales, URBN, Jan 9 2014 [↩]