Shelly Banjo is a Bloomberg Gadfly columnist covering industrial companies and conglomerates. She previously was a reporter at Quartz and the Wall Street Journal.

It's time for Urban Outfitters to re-think its thing for physical stores.

Shares in the hipster-chic retailer dropped by as much as 9 percent Friday after it warned investors, in a quarterly results filing late Thursday, of falling sales in the current quarter. More than half a dozen Wall Street analysts subsequently cut their share-price targets. The consensus now pegs Urban's stock price in the next 12 months at around $31, down from around $40 a year ago.

Lowering Expectations
Shares in Urban Outfitters rallied in early 2016, only to start falling again after poor first-quarter results
Source: Bloomberg

More telling, though, was another sentence tucked into the filing: The retailer said its fairly meager 0.9 percent comparable sales growth across all its brands  in the latest quarter was driven by its direct-to-consumer channel -- meaning e-commerce -- which was partially offset by declining comparable store sales. 

In other words, any sales growth at the company is coming entirely from online sales, with its physical stores actually losing ground, as fewer customers visit and buy less when they do.

Clicks Overtake Bricks
Urban Outfitter's first-quarter sales growth across all its brands came entirely from its online sales
Source: Bloomberg
Across all brands, comparable sales were up 0.9% in the first quarter from the year before, with comp sales up 2.4% at its namesake Urban Outfitters brand, down 2% at Free People and flat for the Anthropologie Group from the year before

Urban is not alone: Pier 1, Bed, Bath & Beyond and Staples are among retailers that have generated growth entirely from online sales in recent quarters, according to research from Morgan Stanley analyst Simeon Gutman. And Urban has previously talked about online sales outpacing store sales.

But unlike other brick-and-mortar retailers (think: Home Depot) that have stopped opening new stores lately, Urban has made clear it intends to keep building new stores.

And it's not just building new stores, but ever-bigger stores to accommodate an expanded assortment of non-clothing products, such as home, beauty, and accessories. The bigger locations will also house areas for its Bhldn wedding and Terrain outdoor-living brands, along with a growing stable of restaurants. 

If this picture is starting to remind you of a department store -- that struggling breed of retail chain failing to lure shoppers -- then you aren't too far off.

Up and Up
Urban Outfitters keeps building more stores, even though its online sales outpace brick & mortar sales
Source: Bloomberg, company filings
*Urban Outfitters expects to open 27 new stores in fiscal 2017

Anthropologie Group CEO and Urban Outfitters Inc. president David McCreight told analysts in May that the "looks on our customers' faces ... while gleefully shopping the new concept" let executives "know that we're headed in the right direction." 

Sorry, we're going to need more evidence than that.

I can see why a retailer would be reluctant to close physical stores, even though the U.S. is decidedly over-stored; doing so can actually hurt sales in the short term. But at least curtailing plans to build new stores is something retail chains lacking sales growth can easily do -- if only they could kick their new-store habit.

Maybe Urban should pay more attention to the numbers that show its stores aren't really paying off, rather than trying to interpret the looks on its customers' faces.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. Urban Outfitters Inc.'s retail segment is comprised of its namesake Urban Outfitters brand, Free People, and the Anthropologie Group, which is made up of the Anthropologie, Terrain and Bhldn brands.

    Across all brands, comparable sales were up 0.9% in the first quarter from the year before, with comp sales up 2.4% at Urban Outfitters, down 2% at Free People, and flat for the Anthropologie Group. 

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