Vincent Shen: Moving on to our first example, I wanted to talk about Urban Outfitters. Recently,
I did a lot of research about Urban Outfitters for the Supernova Explorer One mission.
Sean O'Reilly: One of The Motley Fool's awesome newsletter services.
Shen: Exactly. I wanted to look at it for the apparel sector. And we'll get more broad
into the bigger department stores like Nordstrom as well. Urban Outfitters operates three primary
chains. They have their namesake, Urban Outfitters, Anthropologie, Free People. They also have
some ancillary brands.
O'Reilly: Those two satellite brands, I guess, are the ones that are going gangbusters right
now, if I recall right.
Shen: Yeah. For some years, they were the ones that were providing most of the growth.
Things overall for the company have slowed down. They're in a recovery turnaround phase.
But a big focus for the company, you'll hear multiple times in their different management
calls, earnings calls, presentations that they do, they talk a lot about their weeks
of inventory and managing that number.
I pulled a lot of my calculations from S&P Capital IQ. Urban Outfitters has an inventory
turnover for fiscal year 2016 of 6.5 times. Its days of inventory is at about 56.2. If
you compare that to competitors, think Abercrombie & Fitch, American Eagle, the GAP, Express,
Urban Outfitters seems to be running a little bit more efficiently. The average for some
of those peers is about 4.9 times, or 80 days. It's taking them longer, and they're going
through their inventory fewer times in a year.
So, as I mentioned with the company Urban Outfitters specifically going through this
turnaround phase, by managing their inventory better, basically, for them, it reduces the
need for them to employ markdowns to sell their goods. And obviously, that has a very
direct impact on their margins and profitability. The company has been trying to handle its
inventory better by making some strides in the supply chain. For example, going to a
single SKU system across all of its channels. All of its products now, whether you see them
in store or online, they're all identified by that same SKU number.
This is basically fostering the idea of the omni-channel strategy that you hear so many
retailers employing now, the idea that you want to give a shopper or customer the ability
to buy whatever it is that you're selling whenever and however they want. Whether they're
in your store, at home on their computer, or in your store on the app, which is something
that's becoming very common, where a shopper will go to Urban Outfitters and interact quite
a bit due to these beacons that the stores employ. They'll ping your phone if you're
a participant, and you have the Urban Outfitters shopping app, and it gives you special offers.
A lot of people end up shopping online while they're in store. It's really blending all
these different channels.
O'Reilly: I'm really curious, since we're talking about inventory management, what inventory
days and how much stores are going to have an inventory in two decades. How many things
is Urban Outfitters and Macy's and JCPenney and Walmart, how many things are they going
to have on the shelves? You hear all these retailers talking about their omni-channel
strategy, and what it's going to entail is having a huge ... I hate to bring them up
again, because we talk about them every time we talk about retail, but Amazon. You're going
to have a huge Amazon-like distribution facility that'll filter out to the stores. They're
not going to have every size and every color of shirts. They're just not, it's not worth it.
Shen: Another example more specific to the apparel sector, you look at a company like
Zara, which is known as this fast fashion, very successful. Something they stress is
that they keep inventory levels pretty slim. When they ship out a new collection, for example,
to stores, they do so at a very limited basis. This not only allows them to manage inventory
very well, but also add some exclusivity to the new products that come out. So there's
a bit more elevated demand from shoppers, when they think, "I might not be able to get
this next week, if the store is sold out and that's all they're going to have."
Moving on, still within apparel, but also some of the bigger stores, I wanted to talk
about Kohl's, JCPenney, TJX Companies, Macy's, Nordstrom. Larger chains actually tended to
have lower turnover and more inventory on hand. They average about 3.9 times and 104 days.
O'Reilly: So these things are sitting on the shelves for three months?
Shen: Yeah. Basically it would take them about 104 days to sell through everything they have.
It's very interesting that the bigger stores are actually a little less efficient, you
could call it. But not that surprising.