Why Urban Outfitters Is Buying a Chain of Restaurants -- Yes, Restaurants

Updated from Nov. 17 to include details on pricing.

E-commerce has been forcing many retailers toget creative, and Urban Outfitters (URBN - Get Report) has just taken that to a new level.

Urban Outfitters (URBN - Get Report) today announced that it would be buying Philadelphia-based restaurant group Vetri Family, famous for its pizza chain Pizzeria Vetri. The deal is expected to close by the end of the year and will cost Urban Outfitters $20 million.

Despite the low price, investors were not too happy with the news. Shares of Urban Outfitters were down as much as 12.6% Tuesday morning, though they have since rebounded a bit.

While this isn"t Urban Outfitters" first acquisition, Vetri is certainly its most interesting and surprising one, since it"s so far outsideits main apparel and decor markets.

In a statement this morning, Urban Outfitters offered one explanation for the deal. "Spending on casual dining is expanding rapidly, and thus, we believe there is tremendous opportunity to expand the Pizzeria Vetri concept," Urban Outfitters CEO Richard A. Hayne said.

But an underlying reason for the purchase seems to be the increasing threat of e-commerce.

"Retailers are struggling with how to get traffic in stores," said FBR & Co. analyst Susan Anderson. Consumers are increasingly shopping online, which makes it harder and harder for retailers like Urban Outfitters to draw them into a physical store.

OnUrban Outfitters" second quarter earnings call, Hayne noted that a slowdown in the store channel could be due to increased online shopping over the Labor Day holiday weekend when people were traveling. And it seems that things haven"t gotten much better since then. Shares of Urban Outfitters have declined17% in the past three months, due to slowing retail sales and slumping profit margins.The company"s stock was trading down almost 9% in early afternoon trading on Monday.

Meanwhile, the food industry has been left largely unscathed by the internet.

"Until they invent actual replicators like on Star Trek, e-commerce is not a threat to the restaurant business," Vetri co-founder Jeff Benjamin told Philly.com.

For now it seems that itsnew restaurant business will operate as usual, but down the line, Urban Outfitters could potentially look at integrating some of its food offerings intoits stores to draw traffic, Anderson suggested. Urban Outfitters has experimented with adding bars and restaurants to some of its New York stores in the past, and this acquisition could be a way to further those tests.

"All the retailers nowadays are trying to drive more and more traffic into the stores, so this could be another way to drive traffic down the road," Anderson said.

Forrester analyst Sucharita Mulpuru-Kodali also thought the Vetri acquisition was a good move. "Restaurants are a rapidly growing area of retail; retailers can run really lucrative restaurants and retailers need to diversify so a sector like this is smart," she said.

Urban Outfitters reported its third quarter earnings after the close on Monday, missing on revenue with$825 million versus expectations of $872.8 million. Earnings, though, were as expected -- 42 cents per share.

Urban Outfitters did not immediately respond to request for comment.

Source: http://www.thestreet.com/story/13367184/1/why-urban-outfitters-is-buying-a-chain-of-restaurants-yes-restaurants.html