Urban Outfitters: Big Plans, Big Problems?

The next time you set foot into your nearest Urban Outfitters (URBN), Anthropologie or Free People, don't expect to find the abundance of clothing you've gotten used to—the company announced it has chosen to chuck apparel and "stuff" will reign supreme.

At its analyst day last week, management rolled out plans for growth that include reducing the amount of clothing it sells and upping its stake in non-clothing merchandise.

Credit Suisse analyst Christian Buss weighed remains cautious even as he calls Urban Outfitters' moves as a step in the right direction. He writes:

The team laid out the next phase of its growth strategy, which boils down to: 1) Expansion of the product line into new categories; 2) Dramatically expanding existing stores in key 25-50 locations; and 3) Extending the company’s lead in eCommerce. These first two strategies raise a number of questions about the company’s long-term margin profile and return on invested capital. While we are ultimately more cautious on the three to five year outlook as a result, we believe that the outlook for earnings power in the short-term (two-three years) is likely to be enhanced, not diluted as accretive new categories are added to the mix.

eCommerce, however, is one strength that sets Urban Outfitters apart from its competition, Buss says:

We view Urban Outfitters as one of the leading retailers in the United States with respect to their eCommerce strategy, with penetration higher than that of any major specialty retailer, and the company shifting investments into margin-accretive emphasis on conversion. To this end, the company is looking to find ways to improve their capabilities by unifying store and online inventories. This unified inventory approach should allow the company to improve in-stock rates, reduce the working capital drag from having unproductive pools of restocking inventory and misalignment of store inventories with demand. This effort will also allow the company to roll out pick-up in store and delivery from store. Over time, we expect URBN to expand eCommerce penetration to 36%.

Investors have opted out of accessorizing with Urban Outfitters today–shares have dropped 0.8% to $35.80, while Abercrombie & Fitch (ANF) is off 1.5% at $34.13 and Gap (GPS) has ticked down 0.1% to $41.16%.