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Investment Overview for Urban Outfitters (NASDAQ:URBN)
- Urban Outfitters Stores EBITDA Margin: Urban Outfitters Stores EBITDA Margins increased in 2012 to 24.4% with the gradual decline in cotton prices. They further improved to 24.8% in 2013 as the company kept a check on promotional activities by delivering appealing merchandise. However in 2014, due to certain off pitch fashion calls, Urban Outfitters struggled to attract customers and ultimately ushered heavy markdowns to compensate for low store traffic. This drove its margins down to 21.7%. Nevertheless, going forward we expect this figure to increase gradually and stabilize at 22%, backed by an improvement in the company's merchandise portfolio. However, if the U.S. apparel industry remains highly promotional, and the company faces problems of inventory hangover due to an imbalance in merchandise mix, its margins can decline. If the figure plummets to 21% by the end of the Trefis forecast period, there could be 5% downside to our price estimate. Conversely, if manufacturing costs come down, Urban Outfitters maintains tight control over its inventory and operates with more full priced sales, its margins can improve. If the figure increase to 24%, there could be 5 % upside our price estimate.
- Urban Outfitters Stores & Internet Revenue per Square Foot: Urban Outfitters revenue per square foot declined sharply to $693 in 2011 due to company's slow moving women's apparel business. In 2012, the figure improved to $737 due to the retailer's enhanced focus on women's merchandise and growth in online revenues. Revenue per square foot fell once again in 2013 as the brand made a few off-pitched fashion calls resulting in botched up launch of new collections. The figure fell to $695 in 2013 and improved only slightly to $696 in 2014. Going forward, we expect the brand's revenue per square foot to increase steadily and reach $850 by the end of our forecast period, driven by fewer promotional activities, growth in online revenues and development of omni-channel platform.
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 remains at the current levels through to the end of the Trefis forecast period, there can be 10% 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 builds a strong omni-channel platform, the figure can improve. If the revenue per square foot increases to $980 by the end of 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.
Urban Outfitters generates the most value for the company, followed by Anthropologie and Free People and Other stores.
Ratio of Free People & other stores revenues to store revenues is increasing rapidly
The ratio of Free people & other stores revenues to store revenues has increased from around 3% in 2009 to 10% in 2014, driven by rapid growth of Free People and continued expansion. With increasing brand popularity, this business is expected to contribute better 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 $995, which is higher than revenue per square foot of $696 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 234 versus 196 for Anthropologie as of 2014.
Significant scope for expansion in the U.S.
Currently, Urban Outfitters brand operates 194 stores in North America, out of which, 179 are in the U.S. Apart from California, New York and Texas, the brand does not have a double-digit store count in any other state in the U.S. or even Canada. In comparison, players such as Aeropostale and American Eagle Outfitters operate close to 900 stores in the region. The U.S. apparel market is highly competitive and stands big at more than $300 billion. Therefore, it makes sense for Urban Outfitters to continue its expansion in the region, to better compete with its peers and gain market share by leveraging its store presence and omni-channel portfolio.
Even Anthropologie operates less than 200 stores in the U.S. and Free People and other stores have their presence limited to 100 stores. Hence, there is substantial room for store growth for the company in the U.S.
Although Urban Outfitters' store business has not been at its best in the recent past, online business is continually outperforming. Web traffic and average order value across the brands is on a rise and the proportion of full-price sell-throughs is also increasing. Urban Outfitters' brand image and appealing portfolio are partially responsible for this rise. Remaining can be attributed the the industry wide shift in store to web shopping. According to eMarketer, online sales of apparel and accessories will grow from $52 billion in 2014 to $86 billion in 2018. We believe that Urban Outfitters will remain at the forefront of this growth with its omni-channel and other online initiatives.
Omni-channel retailing refers to providing customers with a seamless shopping experience by integrating the inventory pool across channels. This concept allows companies to attract customers irrespective of their preferred shopping channel. The entire U.S. retail industry is gradually adopting this retailing format and Urban Outfitters is no exception. The company is looking to deploy web, mobile and omni initiatives around website optimization, check out, search, personalization and many mobile and mobile app enhancements. It is also expanding its store base gradually that will provide it with an optimum presence in the country necessary for omni-channel retailing.
Scope for expansion in Asia
Along with its domestic expansion, it makes sense for Urban Outfitters to turn its attention towards international growth. The company took an important step on this front, when it announced its debut in Hong Kong in 2014. While retail expansion in Hong Kong and China appears a valid move, it will not be able to contribute much to Urban Outfitters’ revenues in the near future.
To propel its international growth, the company must leverage its partnership with World Co. Ltd. A few years back, Urban Outfitters entered an exclusive distribution agreement with World Co. Ltd. to market and sell its Free People brand in Japan. We believe that this partnership has reached a stage, where Urban Outfitters can look to sell its other brands in World Co. Ltd. stores across Asia.
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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