Lessons From a Retail Rebel
Urban Outfitters is one of the best-performing clothing chains around. Why? Because it refuses to act like one.
By Susanna Hamner

(Business 2.0) – Laura O'Connor scoops up a sheep-patterned skirt hanging in Urban Outfitters's flagship store in Philadelphia. "This," she says proudly, "was made from a bedsheet." The men's department--this week, at least--is wallpapered with newspaper sports pages dyed pink. That art deco jewelry? O'Connor got the idea while visiting a museum in Prague. "Shopping here should be like a treasure hunt," says O'Connor, Urban's 34-year-old general merchandising manager. "We don't want our customers to be able to walk into another store and buy the same thing."

It's a far cry from the cookie-cutter khakis and stark interiors you'll find at Gap or Express. But the 75-store Urban Outfitters chain is blazing past the competition by rejecting just about every strategy typical of national retailers--from mass-produced merchandise to glitzy advertising and look-alike stores. Instead, O'Connor and her team give every store the feel of a boutique. New and recycled fashions are sold alongside housewares (think beaded curtains and cocktail shakers), creating a thrill-of-the-hunt vibe suited to a thrift store. Urban delivers small batches of new merchandise daily to keep things fresh, while a visual arts staff at each store overhauls the interior design twice a month. That gets customers stopping in often and staying for at least 45 minutes per visit--more than twice as long as shoppers linger in most clothing stores, says Kimberly Greenberger, senior retail analyst for Smith Barney. "Rather than relying on identical stores, Urban creates an experience that's intellectually stimulating," Greenberger says. "That's been a terrific formula for success."

So successful, in fact, that Urban Outfitters--which also owns the upscale women's apparel chain Anthropologie and the bohemian clothing brand Free People--was one of retail's top performers last year. Its net income shot up 87 percent to $90 million in 2004, while revenue increased more than 50 percent to $827 million. Even as sales have grown an average of 30 percent annually for the past five years, Urban sports healthy operating profit margins of 18 percent, with same-store sales climbing 22 percent last year. At the same time, revenue at the larger Gap empire increased just 3 percent on flat same-store sales. And while Gap's stock price has dropped 3 percent since April 2004, Urban's has soared 91 percent to $44 a share.

Urban's rebellious streak started in 1970, when CEO Richard Hayne, then 23, opened a Free People boutique selling used and new clothing and furniture to the University of Pennsylvania crowd. Five years later he changed the name to the more evocative Urban Outfitters and began expanding into New York, Boston, and other cities. In 1993 the company went public at about $24 a share, first adding a few stores each year in college towns and lately opening as many as 30 outlets annually.

Now 57, Hayne has developed a recipe for success that goes far beyond rapid expansion. For starters, he delegates the trendspotting to O'Connor, her boss Ted Marlow, and their 20 buyers and designers. The fashion scouts get free rein to scour the globe in search of ideas; each travels about three months out of the year. "They'll go to a city for a long weekend," says Marlow, president of Urban's retail division, "and just hang out at bars or walk the streets."

Though globe-trotting designers are fairly common, traveling with buyers in tow is not. The two-person teams get cutting-edge fashion into stores faster. Say a buyer is struck by a backless tunic in Stockholm; the designer can immediately begin figuring out how to make a version that fits Urban's price points. Similarly, if a designer spots a lamp at an Asian bazaar, she can confer with a buyer and decide whether to import the item or manufacture a similar product independently.

That close relationship fosters another key strategy at Urban: 50 percent of its merchandise comes from outside vendors such as Indian sari merchants and brands like Puma and Lacoste. Not only is that highly unusual for a chain--you'd never find Levi's for sale at Abercrombie & Fitch or Gap--but it also gives Urban a tremendous forecasting advantage. An incorrect guess on a single trend can cripple a traditional retailer's quarterly earnings, but Urban depends not just on its own hunches but also on those of outside vendors. "If we were solely focused on our private development, we'd really have a narrow view," O'Connor says.

Instead of manufacturing a few styles in abundance, Urban orders limited volumes of many styles, so it's rarely forced to unload large quantities of inventory at bargain prices. A planning and allocation team monitors each store's sales, so if a shop runs out of a tank top, headquarters drops off a few more. If an item isn't selling, Urban immediately marks it down, but doesn't replace its entire inventory monthly like most retailers.

Urban also saves money by shunning advertising, part of its quest to act more like a collection of boutiques and less like a chain. Instead, it pours 2 to 3 percent of its annual revenue into visual display teams--typically four artists per store--who redesign the motifs twice a month. Those quick-change acts encourage customers to stop in to see what's new, while the "organized clutter" design keeps them around by selling unexpected items side by side. Urban even places Xboxes in its menswear sections so bored boyfriends won't pressure female shoppers to leave. That helps the company's stores generate $596 in sales per square foot each year--80 percent more than at Limited and Express.

Now the retailer must sustain those stellar sales through its most ambitious expansion yet. Over the next seven years, the company is looking to increase its presence by 20 percent annually for a total of more than 400 Urban and Anthropologie outlets. In Philadelphia, it's testing a new store called Free People, which will sell only that brand. Though some analysts wonder why the company doesn't focus on its proven hits, Marlow says Free People is using many of the same tactics, like frequent store makeovers, that have made Urban successful. "We come up with our own answers, as opposed to doing what everyone else is doing," he says. Unlike the store wallpaper, that's not changing anytime soon.