Urban Joins Other Leading Retailers With Asian Expansion

by Trefis Team
+5.78%
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Trefis
URBN
Urban Outfitters
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Urban Outfitters (NASDAQ:URBN) recently partnered with Japan’s specialty store retailer World Co., Ltd to market and distribute its Free People brand in the region. [1] This marks the beginning of the retailer’s expansion in the world’s third largest economy. Inspired by the brand’s strong comparable store sales growth in the U.S., Urban Outfitters is expecting a healthy acceptance in the Japanese market as well. [1]

Under the Free People brand, Urban Outfitters offers apparel, accessories and gifts to young women in the age group 25-30 years. World Co. has around 2,700 stores across Japan, China, Hong Kong, Taiwan and South Korea for marketing and distribution purposes. [2] We expect this partnership will assist Urban Outfitters in its quest to expand across Asia.

See our complete analysis for Urban Outfitters Gap Inc.

Free People Will Build The Retailer’s Brand Image In Japan

Free People’s physical presence so far has been limited to retail locations in the U.S. and Canada. [2] It is marketed globally through its e-commerce channel in the U.K. and the U.S. Moreover, the Free People wholesale business constitutes only around 3% of the company’s value along with Leifsdottir, according to our estimate. This implies that the financial benefits from this business is quite small. While it might seem to be an insignificant choice for launch in a new market, its strong performance has inspired the retailer to initiate the entry with this brand. Moreover, Urban Outfitters sells its other brands through dedicated stores and only Free People and Leifsdottir are included in the wholesale business segment.

In Q2 of fiscal 2013, the Free People wholesale segment registered revenue growth of 18% and comparable store sales growth of 12%. [3] The retailer expects a similar performance by the brand in Japan as witnessed in the U.S. Free People’s launch clearly indicates that Urban Outfitters is looking to build its brand image in the new market. World Co. will market and distribute the brand through shop-in-shop locations (acquiring some dedicated retail space for a particular brand in a department store) and direct-to-customer sites. [2]

Partnership With World Co. Ltd. Will Complement Urban Outfitters’ Asian Expansion Plans

Most of Urban Outfitters’ retail operations are spread across North America and Europe. [4] The Asian market, which contains two of the world’s largest economies, still remains under-tapped. This region has been significantly lucrative for apparel retailers. For instance, Nike (NYSE:NKE), which has had a presence in China for 30 years, registered an 8% increase in revenues from this region in Q1 fiscal 2013 [5] while Coach’s (NYSE:COH) revenues from China increased 40% last quarter. [6] More recently other American brands like Abercrombie & Fitch (NYSE:ANF) has shifted its sites east.

Urban Outfitters recently unveiled its plans to open stores in Asia in the next two years. [3] Partnering with World Co. is hence a right step. This will not only help Urban Outfitters penetrate the Japanese market but will also help it accomplish its Asian expansion goals. World Co. has a strong presence in Asia with 2,700 stores across Japan, China, Hong Kong, Taiwan and South Korea. [2] The retailer will look to leverage World Co.’s wide reach to build a healthy brand in the Asian markets even before it opens its own stores.

Our price estimate for Urban Outfitters stands at $38, implying a premium of about 5% to the market price.

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Notes:
  1. Urban Outfitters Expands in Japan, NASDAQ, Oct 9 2012 [] []
  2. Urban Outfitters Announces Exclusive Distribution Agreement For Free People In Japan, NASDAQ, Oct 8 2012 [] [] [] []
  3. Urban Outfitters’ Q2 2013 earnings transcript, Aug 20 2012 [] []
  4. Urban Outfitters’ SEC filings []
  5. Nike’s Q1 2013 earnings transcript, Sept 27 2012 []
  6. Coach’s Q1 2013 earnings transcript, Oct 23 2013 []
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