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Why Urban Outfitter's Rising Revenues Are Reason for Caution

Urban Outfitters (URBN) continues to kill it revenue-wise, ringing in a 3rd quarter sales increase of 13.4 percent to $573.6 million, with direct-to-consumer volume rising 32.5 percent to $105.7 million and sales in stores up 9.6 percent to $433.4 million. CEO Glen Senk has good reason to feel a deep sense of accomplishment, especially as he's steered the brand out of a (temporary) plummet in profits in the first quarter of 2009. But Senk's success is making his confidence cup runneth over, which could spell trouble down the road.

"In a dynamic environment, the consistency of our performance is a reflection of our team's discipline, creativity, and skill," Senk said in a statement. Combine his team's toolkit with the rise in revenues and it's no surprise that Senk's expansion plan is aggressive.

Through the end of October, UO opened a total of 29 new stores including: 11 Urban Outfitters stores, 13 Anthropologie stores and five Free People stores and expects to open approximately 45 new stores during the fiscal year. That's reasonable.

What's worthy of a more cautious approach is Senk's proposed opening of 50 to 55 shops in 2012, along with accelerated expansion in Europe and an entry into the Asian market through Japan. Oh, and let's not forget that UO's scrambling to ready its accessories-only store as well as a bridal concept Beholden, to launch next year.

Amid this growing list of concepts, it's not clear how the 55 stores will reflect the mix of UO's brands and its eponymous shops. Urban's been planning to set its smallest brand Leifsdottir up with her own shops for a while now (the collections are currently offered in UO's Anthropologie stores), yet Free People is exhibiting strong growth trends of its own.

Senk's plan to enter Japan -- in a crowded marketplace during tough economic times -- doesn't seem particularly sound. The Japanese already have their fill of fast fashion with the homegrown, multi-billion dollar conglomerate Fast Retailing, parent of Uniqlo. And even Uniqlo's once solid position seems to be slipping, as evidenced by slowing sales and falling profits.

Perhaps Senk wants to follow in the footsteps of Abercrombie & Fitch (ANF) and score deals on renting shops in less appealing retail corridors. Combined with ANF's pricing strategy (think double what's on the American stickers) and it might work in the short term.

Asia's not the only target for expansion. Urban's heretofore unknown, direct-to-consumer business in Latin America is apparently going well enough to warrant a second look.

And I haven't even mentioned Urban's recent foray into designer collaborations which, unlike Target's (TGT) uber-successful GO International capsules, are priced well above the $20 - $100 on UO's standard assortments.

It's admirable that Senk and company want to spread the wealth, as it were, and push Urban's offerings out to more consumers. However, taking all these initiatives together makes Urban's formerly clear strategy look increasingly scattershot. Not to mention, too ambitious.

The annals of apparel retail are littered with examples of brands that expanded too much too quickly. Gap (GPS) is still trying to recover from its missteps in the early 2000s. Abercrombie continues to close underperforming stores as is American Eagle (AEO) with its failed Martin + Osa concept shops.

In this stage of growth, Senk and his team would do well to exercise more cautious optimism. If they feel they must try all these markets, a better route might be e-commerce. Shipping internationally is a lot more cost effective than leasing and merchandising entire stores.

Image via Urban Outfitters