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Investment Overview for Urban Outfitters (NASDAQ:URBN)
- Internet & Catalog Orders EBITDA Margin: Internet & Catalog Orders EBITDA Margins decreased in 2011 due to an increase in cotton costs. However with the gradual decline in cotton prices, margins improved in 2012. We expect the figure to further improve in the near term and later stabilize at 40.5% by the end of the Trefis forecast period.
However, if the U.S. apparel industry remains highly promotional, and the company faces inventory hangover due to an imbalance in merchandise mix, its margins can decline. If the figure plummets to 34% by the end of the Trefis forecast period, there could be 5% downside to our price estimate. Conversely, if manufacturing costs go on decreasing, Urban Outfitters maintains tight control over its inventory and operates with more full priced sales, its margins can improve. If the figure increase to 45%, there could be 5 % upside our price estimate.
- Urban Outfitters Revenue per Square Foot: Urban Outfitters revenue per square foot declined sharply to $545 in 2011 due to company's slow moving women's apparel business. In 2012, the figure improved slightly to $567 due to the retailer's enhanced focus on women's merchandise. We expect the figure to improve in the future as Urban Outfitters adds balance to its product mix,expands internationally, and boosts its marketing. We expect the figure to reach $638 by the end of the Trefis forecast period.
However, fierce competition in the U.S. apparel industry and any further merchandise goof-ups can cost the company its market share. If the revenue per square foot declines to $480 by the end of the Trefis forecast period, there can be 5% downside to our price estimate. On the other hand if Urban Outfitters carry forward the improvement in its product mix, taps lucrative U.S. and international markets for expansion, and attracts more customers with its marketing campaigns, the figure can improve. If the revenue per square foot increases to $700 by the end of the Trefis forecast period, there can be 5% upside to our price estimate.
Urban Outfitters Inc. is a leading lifestyle specialty retail company that operates under its Urban Outfitters, Anthropologie, Free People, Terrain and BHLDN brands, and sells collections of fashion apparels, accessories and home goods in inviting and dynamic store settings. Its core strategy is to provide unified store environments that establish emotional bonds with the customer. It also operates a wholesale segment under the Free People and Leifsdottir brands. In addition to retail stores, the company offers its products and markets its brands directly to consumers through its e-commerce websites and catalogs.
Internet & Catalog Orders business generates the most value for the company, followed by Urban Outfitters and Anthropologie stores.
Internet & Catalog Orders business profit margin nearly twice that of AEO stores
Profit margins for the Internet & Catalog business is higher at 39% compared to 20% for Urban Outfitters or Anthropologie stores. The merchandise sold through the Internet & Catalog Orders segment is sent directly to the consumer from the distribution center. As this merchandise does not go through stores, it incurs no store operating expenses and very low SG&A expenses to the company. As a result, the margins on merchandise sold through this channel is significantly greater than that for merchandise sold through retail stores.
Ratio of Internet & Catalog Orders Revenues to store revenues is increasing rapidly
The ratio of Internet & Catalog Orders Revenues to store revenues has increased from around 17% in 2007 to 31% in 2012, driven by rapid growth in online apparel retail, Urban Outfitters' investments into e-commerce technology and successful online marketing strategies. With the company planning to expand its e-commerce operations, the Internet & Catalog Orders business is expected to generate considerable amount of value to the company's revenue stream in the future.
Higher Revenue Per Square Foot for Anthropologie is Offset by a higher number and average size of Urban Outfitters stores
The Anthropologie stores have revenue per square foot of around $684, which is higher than revenue per square foot of $567 for the Urban Outfitters stores. Anthropologie's high revenue is offset by Urban Outfitters' greater number of stores and higher average retail space. The store count for Urban Outfitters was 206 versus 174 for Anthropologie as of 2012.
Marketing initiatives to elevate brand image
Urban Outfitters is reinforcing its data analytics team to make customer communication more actualized. Over the long run, the retailer plans to reduce its catalog circulation and promote web-based and digital communication. Also, it is increasingly investing in image makers, marketers and stylists to conceive a fascinating brand experience for its customers. Once such example is FP Me by Free People brand, which allows customers to create online profiles, connect with fashion lovers and share various styles & collections’ photos. We believe that this will enhance company-customer interactions, which in turn should positively impact its sales
Rather than expanding aggressively, Urban Outfitters is identifying underpenetrated U.S. and international markets for its expansion where it can generate better revenue per square foot. In the current fiscal year, the company plans to open eight retail stores in Europe and 29 in the U.S. We believe that Urban Outfitters has ample expansion opportunities in the U.S as some of its competitors such as Aeropostale, American Eagle Outfitters and Abercrombie & Fitch operate more than 900 stores in the country.
Greater focus on women's merchandise
Urban Outfitters is trying to have a more balanced product portfolio in order to reach a broader spectrum of customers. It is identifying the underperforming product categories and is specifically working on them. These efforts have been somewhat successful as the 2012 spring collection of knits, wovens and printed tops received good customer responses. If the retailer is able to sustain a firm control over the product mix, it can translate into lower markdowns and ultimately better revenue per square foot.
Plans for Asian expansion
Until last year, Urban Outfitters did not have presence in Asia. The region houses two of the worlds biggest apparel markets i.e. China and Japan. The retailer partnered with World Co. Ltd. last year to market and distribute its Free People brand in Japan. Urban Outfitters stated that the response has been good so far. We note that World Co. Ltd. operates more than 2,700 stores in across various Asian countries, which will make it easier for the retailer to enter new market at later stages. We believe that Urban Outfitters should no longer delay its expansion plans in China, as its apparel market is likely to grow at a healthy pace.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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