Will Free People Be Urban Outfitters' Answer To More Earnings Beats?

Apparel retailer Urban Outfitters Inc. (NASDAQ:URBN) , holding company of Anthropologie, Free People, BHLDN, Terrain, and Urban Outfitters brands, delivered a massive second quarter earnings beat, reporting earnings of 44 cents per share on revenues of $873 million. Shares of Urban have been soaring ever since, and are up over 18% in late afternoon trading on Wednesday.

Despite these top and bottom line accomplishments, Urban’s overall comparable sales did fall year-over-year, declining nearly 5%, though not as much as Wall Street was expecting. Breaking it down by its main brands, comps fell 4% at Anthropologie and almost 8% at Urban Outfitters, while at Free People, same-store sales increased 2.9%.

Free People, a brand known specifically for its hippie style, has been a major growth factor for Urban Outfitters these past few years. Making up about 20% of Urban’s total revenue, Free People could help the retailer stay on this profitable path. But what is it about the brand that resonates with consumers?

What is Free People?

Most importantly, Free People is one of the few apparel retailers today that understands its customer. Like TJX Companies (NYSE:TJX) and Ross Stores (NASDAQ:ROST) know that their core customer is always hunting for deals, Free People knows how much their customer identifies with its central bohemian aesthetic.

Free People’s key customer is very specific too: a “26-year-old girl, smart, creative, confident, and comfortable in all aspects of her being, free and adventurous, sweet to tough to tomboy to romantic. A girl who likes to keep busy and push life to its limits, with traveling and hanging out and everything in between,” the company writes on its website.

And because the brand understands “her,” Free People’s seasonal collections continually reflect that vibe, a factor that makes it stand out from fast-fashion giants Zara, H&M, and Forever 21, three companies that have severely impacted traditional apparel retailers, and even its sister brand, Urban Outfitters.

This intuition, however, has gotten Free People in trouble. Earlier this year, the Coachella music and arts festival announced that it is suing Urban for using the event’s name at Free People in order to sell merchandise. The brand’s retail items in question included things like the “Coachella Boot,” “Coachella Mini Dress,” and “Coachella Valley Tunic.”

Coachella Is Suing Urban Outfitters for Using The Festival's Name To Sell Tunics And Boots https://t.co/8f4WDgacMP pic.twitter.com/Mq4X0IuiEr

— LAist (@LAist) March 16, 2017

In addition to its 120 store boutiques across the country, Free People product is sold in upper-end department stores like Nordstrom (NYSE:JWN) and Bloomingdales, which is owned by Macy's (NYSE:M) , both of which have created in-store concept shops to attract shoppers to the brand.

How Urban Can Capitalize

While it did suffer through a tough fiscal 2017, Free People is on the rebound, and in the last three quarters, the brand has posted positive comparable store sales. The same cannot be said for either the Anthropologie or Urban Outfitters brands. If Urban wants to continue surprising Wall Street like it did yesterday, it should absolutely take advantage of everything Free People offers.

In addition to its loyal customers, Free People has mastered the art of social media, where the brand has been able to connect with its customers in a meaningful way. Its Instagram (NASDAQ:FB) account has 3.2 million followers, its Twitter (NYSE:TWTR) account has 255,000 followers, and most notably, its Pinterest account has nearly 570,000 followers.

With this type of following, Free People, has been able to cultivate the type of targeted engagement with customers, both old and new, that many retailers strive for. By posting catalog-quality pictures on Instagram, for instance, the company is able to see what products work and which ones don’t.

???? on the mind. #mooncyclehat

A post shared by freepeople (@freepeople) on Aug 14, 2017 at 4:35pm PDT

All of Urban’s core brands are popular on Instagram, with Anthropologie boasting 3 million followers and Urban Outfitters sitting at 7.3 million. What makes Free People stand out is its ability to stay consistent in aesthetic and in product. Urban should take what Free People has learned from its own social media success—targeted knowledge about its customers—and apply it to its other brands.

Urban should also consider expanding Free People. Since its stores are much smaller in size compared to the average Urban Outfitters or Anthropologie, one could assume the company would not have to shell out a large amount of cash. This move, however, would be risky, as brick-and-mortar retail sales are in crisis. Over-saturation of the market would also be a concern, since Free People is still considered a covetable brand.

But Urban Outfitters needs to do something, and Free People is right there for the taking. It’s one of the most desired brands among young women, with a bustling social media presence that gives its management key information about what designs and merchandise to introduce next. Free People is Urban’s bohemian dream, and has the potential to help boost the company’s bottom line moving forward.

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