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Investment Overview for Urban Outfitters (NASDAQ:URBN)
WHAT HAS CHANGED?
- Urban Outfitters announced its second quarter results on August 16, when it comfortably beat the consensus estimates for EPS and revenue. Urban Outfitters managed to boost its profit and margins in the quarter, on account of strong sales, improved merchandise margins, and an increased focus on expense management. The company's sales growth was driven by impressive growth in its women's apparel and accessories segment to a great extent, and further through its emerging categories such as intimate, home, and beauty. Unseasonably cold weather in May, usually its strongest month of the quarter, resulted in negative retail comparable sales for the month. However, this rebounded in June, and were further spurred on in July. A 1% rise in comparable sales for the company was principally due to a 5% rise in its Urban Outfitters brand, with flat comparable sales reported at Free People, and a 3% decline at Anthropologie. The company expects further gross margin improvement in the third quarter, though at a more moderate rate than in the first half of the year, primarily due to higher margins at Anthropologie and Urban Outfitters, partially offset by higher markdowns at Free People to clear inventory.
- Sluggish first quarter growth appeared to be a norm in the apparel retail industry; yet Urban Outfitters posted record net sales for the same period. Foot traffic at malls has declined considerably, owing to a weak economy and the rise of omnichannel retailing, which is forecast by Forrester to grow to $1.8 trillion in the US by 2017. Urban has been a first mover in this space, and now derives about a quarter of its sales through e-commerce. More significantly, it believes it has figured out what the shoppers want, and is making efforts to transform its stores to please its customers. The company is trying to create an unmatched in-store experience which would help them to capture a greater share by expanding its store format and providing a broader offering in categories such as home, beauty, and intimates, besides Anthropologie's BHLDN wedding brand, and the Terrain outdoor living brand. While several retailers have been undertaking store closures, Urban Outfitters still seems to be in an expansion phase. According to the CEO Richard Hayne, the US is overstocked in the apparel category, with approximately ten times more retail space per capita than in Europe. A factor working in URBN's favor is that it does not have a sprawling store footprint; instead, it undertook a cautious approach, which is serving them well now.
- The retailer has begun to offer more than just clothing at some of its stores. In three of its locations - Brooklyn, Los Angeles, and Austin - the company's stores feature several bars. In its Brooklyn store, called Space Ninety 8, there are two bars, one on the roof, and another next to its men's department on the third floor, as well as an Israeli restaurant. The company has also purchased the Vetri family restaurant group, which includes pizza chain Pizzeria Vetri, for $20 million. The reason stated by CEO Richard Hayne was the substantial rise in the spending on casual dining, which can help the retailer to gain directly from this acquisition. However, indirect gains are also in the cards as Urban Outfitters can leverage the pizza outlets to improve the shopping experience and thus drive store traffic. In the wake of the growing customer disconnect with brick-and-mortar stores and increasing use of online shopping, retailers across the industry are trying hard to win customers back. And this acquisition by Urban Outfitters is a move on that front.
- 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 22% and the same factors impacted the company's margins in 2015 where they settled at 21.5%. Going forward, we expect the declining trend in the margins to continue given that fast-fashion retailers have changed the industry dynamics and casual apparel players now rely on discounts to attract traffic. Also, the expansion of omni-channel retailing will increase the proportion of online sales, which by nature is a low margin business. However, if Urban Outfitters manages to operate with fewer discounts leveraging its design improvements, which leads to a gradual improvement in margins going forward, there can be about 5% upside to our price estimate for the company. On the contrary, 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 faster than expected. If the figure plummets to 19% by the end of the Trefis forecast period, there could be 5% downside to 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 the 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 a botched up launch of new collections. The figure fell to $695 in 2013 and to $663 in 2014. The decline continued in 2015 to $648 as customers kept moving to fast-fashion brands. Going forward, we expect the brand's revenue per square foot to decline for the next couple of years and improve slowly thereafter, as the company develops a sound omni-channel platform and positions its merchandise designs and inventory turnover cycle in line with buyer preferences.
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 5% downside to our price estimate. On the other hand if Urban Outfitters can 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 $800 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.
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 4% in 2011 to 11% in 2015, 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 $994, which is higher than the revenue per square foot of $644 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 240 versus 215 for Anthropologie as of 2015.
Significant scope for expansion in the U.S.
Currently, Urban Outfitters brand operates around 200 stores in North America, out of which, ~180 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 just around 200 stores in the U.S. and Free People and other stores have their presence limited to 114 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, the online business is continually outperforming. Web traffic and average order value across the brands is on the 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. The online growth can also be attributed to the industry wide shift from store to web shopping. According to eMarketer, online sales of apparel and accessories will grow from $60 billion in 2015 to $90 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.
Addition of a pizza chain
In 2015, Urban Outfitters unveiled the acquisition of The Vetri Family group of restaurants, which included the award winning Pizzeria Vetri for an undisclosed amount. Given the rapid growth of consumer spending on fast-casual dinning, the retailer stands to gain directly from this acquisition. However, indirect gains are also in the cards as Urban Outfitters can leverage the pizza outlets to improve the shopping experience and thus drive store traffic. In the wake of the growing customer disconnect with brick-and-mortar stores and increasing use of online shopping, retailers across the industry are trying hard to win customers back. And this acquisition by Urban Outfitters is a move on that front.
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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