Direct-to-consumer business has become one of the key growth drivers for the U.S. apparel retailers amid a competitive retail environment. Players such Abercrombie & Fitch (NYSE:ANF), Gap (NYSE:GPS) and American Eagle Outfitters (NYSE:AEO), are thriving on the back of this trend. Urban Outfitters (NASDAQ:URBN) also possesses a strong direct channel, which contributes about 40% to the retailer’s value, according to our estimates. This business generates significantly higher margins than Urban Outfitters’ other businesses and is the most valuable segment for the retailer.
Urban Outfitters’ direct channel has been grown rapidly, complemented by the industry trends and the retailer’s strategies such as focus on marketing, increasing product categories and integrating inventories across its channels. The revenue contribution from this channel has increased from 14% to 20% over the course of the last five years.  We believe that this figure can touch 30%, towards the end of the Trefis forecast period.
Direct-To-Consumer Business Is Growing Both Domestically And Internationally
Urban Outfitters’ direct-to-consumer revenues have been growing rapidly over the last four years. The retailer witnessed substantial growth even during the recessionary environment, as the revenues from this segment grew by 18% in 2009, and 34% in 2010. This strong growth continued in fiscal 2013 as well. 
Urban Outfitters has a growing following on social networking sites such as Facebook and a growing customer base on its mobile commerce channel. The retailer is making significant investments in new marketing initiatives, which include engaging offers and promotions through its direct channels. Urban Outfitters is using the core products of Adobe Flex and the e-commerce expertise of Allurent to enhance its service offerings.
The retailer has also launched an e-commerce website in Europe, and its web-based channel in Germany is growing rapidly.  The web orders on the German website increased by 88% in Q3 fiscal 2013, along with the total international increase of 66%.  This positions the retailer’s direct-to-consumer channel favorably in the international markets.
The initiatives such as web-exclusive products, an increase in product variety and creative catalog designs, have assisted direct business’ growth. 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. 
Online Segment In Apparel Industry Is Booming
In the current scenario, the direct-to-consumer business in the apparel industry is booming. Major players such as Gap and American Eagle Outfitters, have reported considerable growth in this segment in their recent results. With the increasing popularity of online shopping, the aforementioned trend is likely to benefit retailers that are focusing on e-commerce.
Comparing Urban Outfitters to other direct-to-consumer focused retailers, such as American Eagle Outfitters and Abercrombie & Fitch, we conclude that a boom in the online apparel industry will have a greater impact on Urban Outfitters’ valuation relative to peers. According to our estimates, this channel constitutes about 40% of Urban Outfitters’ value, compared to 27% for American Eagle Outfitters and 33% for Abercrombie & Fitch.
If Urban Outfitters’ direct revenues increase at an average of 25% annually for the next three years, similar to the historic average, there could be 5%-10% upside to our price estimate.
Our price estimate for Urban Outfitters stands at $38, which is just ahead of the market price.Notes:
- Urban Outfitters’ SEC filings [↩] [↩]
- Urban Outfitters’ Q3 fiscal 2013 earnings transcript, Nov 19 2012 [↩] [↩]
- Urban Outfitters’ Q2 fiscal 2013 earnings transcript, Aug 20 2012 [↩]