Direct-To-Consumer Business, Growth Plans Will Drive Urban Outfitters Q3 Results

by Trefis Team
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Upside
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Trefis
URBN
Urban Outfitters
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Urban outfitters (NASDAQ:URBN) is scheduled to release its Q3 fiscal 2013 earnings on November 19th. [1] The key area to focus on will be its fast growing direct-to-consumer business and its international expansion plans. The direct-to-consumer revenues have registered substantial increase in the last two quarters and we expect the trend to continue. [2] Moreover, inspired by the strong performance of its Free People Brand, the retailer recently announced the entry of this brand in Japanese market. [3] Since it partnered with World Co. Ltd., which has a strong presence in Asia, any updates regarding its Asian expansion strategy will be closely monitored.

With retailers such as American Eagle Outfitters (NYSE:AEO) and Gap Inc. (NYSE:GPS) registering strong growth in comparable sales and direct business respectively, it seems that the overall teen and young adult’s apparel industry is picking up. [4] Since Urban Outfitters’ brand is comparable to the above ones, we expect its revenues to record a moderate rise driven by strong direct-to-consumer business.

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Strong Direct-to-Consumer business

Urban outfitters registered strong direct-to-consumer revenue growth in the previous two quarters. The revenues rose by 15% and 22% respectively in first and second quarter of fiscal 2013. This, coupled with the retailer’s plans of aggressive marketing for web-based channel in the second half of fiscal 2013, is expected to drive the revenue growth. [5]

The initiatives such as a sale of exclusive products through web-based channels, an increase of product categories and an increase in marketing to acquire larger customer base are likely to assist the growth of the direct-to-consumer channel. Urban Outfitters ships the products from both, the stores and the fulfillment centers, thus reducing the problems of out of stock inventory. The retailer is also looking to increase its product offering through web based channel. For instance, it increased the number of dress styles by 50% year-on-year basis in the last quarter. [5] We expect this to contribute to the revenue growth in this quarter as well.

Improving Teen Apparel Industry

Although the teen and young adult’s apparel industry remains highly promotional, there have been indications that industry on the whole is improving. The competition has been stiff, but the major players such as American Eagle Outfitters, Abercrombie & Fitch. (NYSE:ANF) and Gap Inc. have managed to post promising results. Abercrombie & Fitch. and Gap Inc. posted strong direct-to-consumer growth of 25% and 24% respectively in their recent results. Moreover, American Eagle Outfitters’ comparable store sales rose by 9% in recent quarter.

These figures imply that the industry is gaining momentum and the direct-to-consumer channel is driving significant traffic. The major players are benefiting from this trend, and we expect it to contribute to Urban Outfitter’s growth as well.

Updates On Expansion Plans

Urban Outfitters recently partnered with World. Co. Ltd. to market and distribute its Free People brand in Japan. This brand has performed quite well for the retailer registering a same store sales growth of 12% in Q2 fiscal 2013. Apart from Japan, World Co. Ltd. has a strong presence in other Asian countries as well with over 2,700 stores across Asia. Given the fact that Urban Outfitters is well positioned for expansion, investors and analyst will be keen on updates on any such plans.

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’ Investor Relations []
  2. Urban Outfitter’s SEC filings []
  3. Urban Outfitters expands in Japan, NASDAQ, Oct 9 2012 []
  4. Companies’ SEC filings []
  5. Urban Outfitters’ Q2 fiscal 2013 earnings transcript, Aug 20 2012 [] []
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