For more than four decades, Urban Outfitters Inc.’s namesake brand has been a favorite among hip young adults in search of edgy products and a cool place to hang out. Though its brand ethos is the envy of many in the apparel world, sales have until recently been on the decline, and the company has had to face the fact that having customers spend more time chilling in its stores doesn’t necessarily increase sales. So what’s an iconic brand to do?

Urban Decay

At the new Urban Outfitters store in Herald Square, steps from the Macy’s flagship at the southernmost edge of New York’s historic garment district, two 20-something women with multiple tattoos and pink ponytails fondled a fur-trimmed suede coat priced at $248. “I love it,” said one, holding the coat up in front of a full-length mirror. “I just don’t know if I love it enough.”

This is a telling comment, given the recent situation at Urban Outfitters, Inc. While its Anthropologie and Free People brands are among the best performers in apparel these days, the flagship Urban Outfitters brand has been floundering under pressure from a host of factors that have made sales and earnings growth elusive. The retailer, whose apparel, footwear, accessories, apartment décor items, gifts, vinyl records and other unique products appeal to hipster men and women ages 18-28, has spent much of the last two years trying to stem a vexing slide in sales despite no apparent loss of customer interest.

Total company sales grew by almost 8% last year to $3.3 billion, but sales at the Urban brand, which represent 42% of total sales (down from almost 46% last year), rose by only 1%. Comparable store sales at the brand rose by 4% in the fourth quarter, finally turning the corner after five straight quarters of negative comps, but lagged behind total company comps, which increased by 6%.

Urban’s performance is in sharp contrast with that of its sister brands. Total sales at Anthropologie (named after founder and CEO Dick Hayne’s major at Lehigh University, from which he graduated in 1969) grew by 8% to $1.38 billion. Anthro\’s comps, which grew by 6% in the fourth quarter, have been positive for each of the past 11 quarters. The bohemian chic lifestyle brand, which caters to 25 to 40-year-old women, plans to dramatically expand its home décor assortment and enlarge many of its existing stores. Free People, the company’s wildly successful upscale women’s apparel brand named after the very first store opened in Philadelphia by Hayne and his then-wife Judy (his current wife, Meg, is Free People Brand President and Corporate Chief Creative Officer), has 102 stores and a thriving wholesale business. It has enjoyed double-digit total and comp sales gains for each of the past eleven quarters. Women ages 25 to 35 love its exotic fabrics, deep colors and artistic prints.

The success of Anthropologie and Free People must make Urban’s difficulties all the more frustrating for management. Hayne, who returned to the CEO post in early 2012 after the departure of former chief executive Glenn Senk, has blamed much of the Urban brand\’s troubles on the fact that it had become a bit too young and cheap, and needed to refocus.

It’s a Jungle Out There

Several external factors are no doubt thwarting Urban’s ability to grow sales as well, which in this zero-growth apparel retail environment essentially boils down to taking share from competition. At the top of the list is the economy which, though recovering, is doing so at a snail’s pace, and in ways that are barely apparent to Urban’s key 18 to 28-year-old Millennial demographic. Many of them feel like they’ve won the lottery if they find jobs in their fields after college, despite earning starting salaries that have barely budged from what recent college grads earned a decade ago. Meeting basic living expenses is a challenge for many of them, so their ability to spend on premium-priced fashion is limited.

Then there’s the über-competive, overcrowded and highly promotional nature of the contemporary apparel space. Fast fashion brands are gobbling up market share faster than you can say Candy Crush. A 23-year-old shopping in the Fifth Avenue store admitted to me that she loves to check out Urban for style ideas and then buy similar product at H&M or Forever 21, because Urban’s prices are a little out of her reach.

In short, Urban is trying to appeal to a relatively cash-strapped consumer for whom apparel has become less important, with premium priced fashion that is available elsewhere for less. Not a great situation.

Urban Hip

One thing Urban doesn’t seem to suffer from, however, is erosion in its brand equity. This makes it the envy of just about every teen and young adult specialty retailer these days. At a time when Abercrombie is thinking of removing its logo from products, and American Eagle is resorting to day-in, day-out percent-off sales to drive traffic into its stores, Urban Outfitters has managed to maintain its image as a desirable brand. Walk around New York, San Francisco, Washington, DC and Philadelphia, and you’ll see reusable shopping bags emblazoned with its logo hanging from the hippest of shoulders. The store in Cambridge is rumored to be one of the city’s top tourist destinations, after Harvard and MIT.

One factor boosting brand equity is Urban’s tendency to push the envelope of appropriateness. Although there isn’t space here to list all the controversies that have arisen over graphic tees with offensive slogans (like the “Eat Less” t-shirt worn by a rail-thin model that raised the ire of health professionals concerned about adolescent eating disorders), gift items like “Ghettopoly” (whose properties carried names like “Cheap Trick Avenue” and “Smitty’s XXX Peep Show”) and other products that, pushing the boundaries of good taste, cause mentions of the brand to go viral.

Urban Planning

The company has also worked hard to burnish its cool city image. About a year and a half ago, company executives noticed that its suburban mall-based stores, where more teens were shopping, were outperforming urban locations. This was not good news for a brand whose ideal customer is an urban 20-something who would not want to be caught dead wearing the same clothes as a high school freshman. So the company began to retool its marketing to appeal to an older crowd that, it felt, rightly or wrongly, had more discretionary income than suburban teens. It added more sophisticated product and worked to improve product design, workmanship and components, including the use of higher-quality fabrics.

One of the most heroic initiatives the company has embarked upon, however, has been to improve visual merchandising both online and in-store. By upping the experience ante it has transformed its stores into places where customers would want to hang out, not just shop. Hayne recently told analysts, “The store experience must be like a performance, with the energy and precision of a Broadway play.”

The 57,000-square foot Herald Square store, a “lifestyle center” located at the corner of 34th Street and the Great White Way, and six times larger than the average Urban Outfitters store, is this strategy on steroids, a virtual shrine to the brand. It can be better described as a mini-department store, boasting a 900-square-foot coffee shop with marble counters; Sephora-sized beauty shop-in-stores; huge intimates department; endless banks of fitting rooms; vast shoe department with a machine that can custom print colors on Converse Sneakers; music department selling speakers, record players, a collection of vinyl records exclusive to the location; pricey vintage clothes; furniture department; and one of the brand’s newest offerings, an activewear department called Without Walls.

Urban Renewal

Millennials are serious omnichannel shoppers who like to visit stores and then order online, so the strategy of transforming the stores into irresistible shopping destinations could be key to the brand’s future growth.

However, though Urban’s customers seem to be coming back, and buying more online than before, it remains to be seen whether it will be enough to offset the sluggish growth in brick-and-mortar sales. This puts the retailer in the uncomfortable position of having sales and profit performance out of synch with its brand cachet.

The merchandising and planning teams are reportedly working to fix the problems in apparel. Last year, the division underwent a complete reorganization with the addition of new design, merchandising and marketing talent. The team has begun to improve the product from both a styling and a quality standpoint. Management reported that average prices of the Urban product are up by double-digits compared to a year ago, a pretty bold step in this market environment.

Though there are early indications that the new direction is a good one, should these initiatives fail to work, the company might have to take some more drastic actions, like replacing some of the more established members of management with new, more innovative merchandising pros willing to take more risks. These folks might develop compelling, must-have, localized product assortments that its customers will snap up regardless of the fact that they’re saving for the next big tech product launch. Urban might need to get over its need to be premium-priced, and instead figure out how to price in a way that doesn’t drive their customers to the competition while maintaining profitability

What Urban must never do, however, is tell young teens that it wants them shopping there. Because as we all know, that’s the fastest way to send them scurrying for the door, taking their parents’ credit cards with them.